PRELIMINARY PROXY STATEMENT
EMPIRE ENERGY CORPORATION
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Empire Energy Corporation
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(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement (if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Class
B Redeemable Voting Common Stock
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(2) Aggregate number of securities to which transaction applies: 6,000,000
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$1.20
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(Amount represents estimated proceeds based on the purchase and sale
agreement provisions applied to the September 30, 2000 book value of
assets and liabilities in the proposed transaction.)
(4) Proposed maximum aggregate value of transaction:
$7,200,000
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(5) Total fee paid:
$1,440
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form of schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[EMPIRE ENERGY LOGO]
7500 COLLEGE BLVD.
SUITE 1215
OVERLAND PARK, KANSAS 66210
_______________, 2001
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Empire Energy Corporation to be held on February 16, 2001, at 1:30 p.m., local
time, at our corporate headquarters, 7500 College Blvd., Suite 1215, Overland
Park, Kansas 66210.
At this important meeting, you will be asked to consider and to vote upon a
proposal to approve the merger transaction between Empire Energy Corporation
(herein "Empire") and Commonwealth Energy Corp. (herein "Commonwealth") that
provides for Empire to acquire all of Commonwealth in exchange for its issuance
of approximately 6,000,000 shares of Empire Class B Redeemable Voting Common
Stock. A copy of the merger agreement is attached to the accompanying proxy
statement as Annex I. In connection with the Merger, Empire's articles would be
restated to provide for 1) the increase of its number of board of directors from
five (5) to seven (7); and 2) the authorization and issuance of 6,000,000 shares
of a second class of stock, Class B Redeemable Common Voting Stock having a par
value of $.0001 per share. In addition to these amendments to Empire's articles,
Messrs. Lorne Torhjelm and Sieg Deckert will be appointed to Empire's board of
directors. Empire will also form Empire Exchangeco, a wholly-owned Canadian
subsidiary in order to effectuate the merger. The casting of an affirmative vote
for consummating the merger with Commonwealth will also approve the amendment of
Empire's articles of incorporation to provide for the aforementioned items.
We urge you to read the accompanying proxy statement which includes details
about the proposed merger transaction and the amendment and restatement of our
articles of incorporation and other important information about us, including
pro forma financial information.
Our board of directors has carefully reviewed and considered the terms and
conditions of the proposed merger transaction as to the fairness of the
consideration to be paid by Empire to Commonwealth from a financial point of
view and, along with management, fully support this acquisition.
The proposed merger transaction described in the accompanying proxy
statement will be completed only if it is approved by a majority of the votes
that are entitled to be cast by holders of shares of Common Stock, voting
together as a class. Whether or not you plan to attend the meeting, we urge you
to complete, sign, date and return the enclosed proxy card promptly in the
accompanying postage-paid envelope. You may, of course, attend the meeting and
vote in person, even if you have previously returned your proxy.
OUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND THE AMENDMENT
AND RESTATEMENT OF ITS ARTICLES OF INCORPORATIONS TO PROVIDE FOR THE TERMS
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF the merger agreement and the amendment and restatement of articles
of incorporation. The merger transaction represents an important step in our
efforts to deliver value to our stockholders.
Sincerely,
By: /s/ Norman L. Peterson
-------------------------------
Norman L. Peterson
Chairman of the Board and
Chief Executive Officer
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[EMPIRE ENERGY LOGO]
7500 COLLEGE BLVD., SUITE 1215
OVERLAND PARK, KANSAS 66210
-----------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held February 16, 2001
We will hold a special meeting of stockholders of Empire Energy Corporation
(herein "Empire") on February 16, 2001 at 1:30 p.m., C.S.T., at our
headquarters, 7500 College Blvd., Suite 1215, Overland Park, Kansas 66210 for
the following purpose:
To consider and vote upon a Merger Agreement, dated December 12, 2000, with
Commonwealth Energy Corporation (herein "Commonwealth"), a Canadian corporation,
under which Empire will acquire all of Commonwealth's Common Stock in exchange
for approximately 6,000,000 shares of Empire Class B Redeemable Voting Common
Stock. In addition to voting on the Merger, shareholders will also be voting
upon the amendment and restatement of Empire's Articles of Incorporation. In
connection with the Merger, Empire's articles of incorporation would be amended
and restated to provide for 1) the increase of its number of board of directors
from five (5) to seven (7); and 2) the authorization and issuance of 6,000,000
shares of a second class of stock, Class B Redeemable Common Voting Stock having
a par value of $.0001 per share. In addition to these amendments to Empire's
articles, Messrs. Lorne Torhjelm and Sieg Deckert will be appointed to Empire's
board of directors. Empire will also form Empire Exchangeco, a wholly-owned
Canadian subsidiary in order to effectuate the merger. The casting of an
affirmative vote for consummating the merger with Commonwealth will also approve
the amendment of Empire's articles of incorporation to provide for the
aforementioned items.
The Merger Agreement provides for Empire's acquisition of Commonwealth in
exchange for approximately 6,000,000 shares of Empire Class B Redeemable Voting
Common Stock. Following the merger, Empire's existing shareholders will own
approximately 73% of the resulting merged company. A copy of the Merger
Agreement is attached as Annex I to the proxy statement that accompanies this
notice.
Only holders of record of our Common Stock at the close of business on
January 9, 2001 are entitled to notice of, and to vote at, the meeting and any
adjournment or postponement of the meeting.
We describe the proposal in more detail in the accompanying proxy
statement, which you should read carefully before you vote. THE ENCLOSED PROXY
IS SOLICITED BY OUR BOARD OF DIRECTORS. We urge you to date, sign and return the
enclosed proxy promptly. We are enclosing a postage-paid reply envelope for your
convenience. You are cordially invited to attend the meeting in person. The
return of the enclosed proxy will not affect your right to vote if you attend
the meeting in person.
Under the Utah Revised Business Corporation Act ("URBCA"), the Empire
shareholders have the right to dissent from approving the merger transaction
(and the other matters that are subject to shareholder vote) by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation in anticipation of the transaction unless exclusion
would be inequitable) of such shares. In the event of disagreement between the
parties (Empire and the dissenting shareholder) on fair value, fair value may be
determined by the court in an action timely brought by the corporation.
By Order of the Board of Directors,
By: /s/ Norman L. Peterson
------------------------------------
Norman L. Peterson
Chief Executive Officer
Dated: ____________, 2001
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PROXY STATEMENT
We are furnishing this proxy statement to the holders of shares of our
Common Stock in connection with the solicitation of proxies by our board of
directors for use at a special meeting of stockholders to be held on February
16, 2001, at 1:30 p.m. C.S.T., at our corporate headquarters, 7500 College
Blvd., Suite 1215, Overland Park, Kansas 66210 and at any adjournment or
postponement of the meeting.
All references in this proxy statement to "we," "us," "our" or "Empire"
mean Empire Energy Corporation.
The date of this proxy statement is February 16, 2001. We are first mailing
this proxy statement, the attached notice and the enclosed proxy card to
stockholders on or about January 27, 2001.
The Securities and Exchange Commission (herein "SEC") has not in any way
passed upon the merits of the transaction described herein and any
representation to the contrary is an offense.
TABLE OF CONTENTS
Circular Summary...............................................................1
GLOSSARY OF CERTAIN TERMS...................................................6
GENERAL PROXY INFORMATION......................................................9
SOLICITATION OF PROXIES.....................................................9
APPOINTMENT AND REVOCATION OF PROXIES.......................................9
ADVICE TO BENEFICIAL SHAREHOLDERS..........................................10
VOTING OF PROXIES..........................................................10
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF................................10
EMPIRE EXECUTIVE COMPENSATION..............................................11
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT
CONTRACTS..................................................................12
COMPENSATION OF DIRECTORS..................................................12
MATTERS TO BE ACTED UPON......................................................13
MERGER WITH COMMONWEALTH ENERGY CORP. BY PLAN OF ARRANGEMENT...............13
A) BUSINESS OF COMMONWEALTH......................................17
B) BUSINESS OF EMPIRE............................................22
C) INCOME TAX CONSIDERATIONS.....................................26
U.S. Taxpayer Information.....................................26
D) SECURITIES LAWS MATTERS.......................................26
U.S. Securities Law Information...............................26
E) PROCEDURE FOR THE ARRANGEMENT BECOMING EFFECTIVE..............28
Procedural Steps..............................................28
Court Approval................................................29
Timing........................................................29
Merger and Related Agreements.................................29
Exchange of Share Certificates................................31
F) RISK FACTORS AND ADDITIONAL INFORMATION.......................31
G) POST-ARRANGEMENT INFORMATION ABOUT EMPIRE.....................33
Directors and Officers of Empire..............................33
Other Information About Empire Management.....................35
Compensation of Empire Executives.............................35
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Principal Holders of Empire Voting Securities after Merger
(assuming conversion of Exchangeable Shares but excluding
options and warrants).........................................36
Options and Warrants to Purchase Empire Common Shares.........36
Public and Insider Ownership..................................38
Legal Matters.................................................38
Share and Loan Capital Structure of Empire....................38
Principal Holders of Empire Securities........................39
Summary of Empire Pro Forma Financial Information.............39
Stock Exchange Listings - Empire..............................40
Auditors, Transfer Agent, Dividends...........................40
Other Material Facts..........................................40
H) FAIRNESS OPINION..............................................40
OTHER MEETING MATTERS.........................................................41
CERTIFICATES..................................................................41
Appended Schedules to this Information Circular are as follows:
A. Text of the Merger Agreement
B. Proforma Financial Information at September 30, 2000 and December
31, 1999
C Audited Financial Statements of Commonwealth at December 31, 1999
(to be included in the definitive proxy statement to be filed on
or about January 28, 2001)
D. Quarterly Financial Statements of Commonwealth at September 30,
2000 (to be included in the definitive proxy
statement to be filed on or about January 28, 2001)
E. Amended and Restated Articles of Incorporation of Empire
F. Text of URBCA Dissent Rights
G. Fairness Opinion of Ross Glanville & Associates
H. Form of Proxy (for your records - a separate form is enclosed for
voting and return)
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EMPIRE ENERGY CORP.
("Empire")
7500 College Blvd., Suite 1215
Overland Park, Kansas, 66210
Telephone (913)-469-5615 Fax (913) 469-1544
INFORMATION CIRCULAR
Circular Summary
This Summary is qualified in its entirety by the more detailed information
appearing elsewhere in the Information Circular including the Appendices which,
together with this Summary and the Glossary of Terms immediately following this
Summary, are incorporated into and form part of the Information Circular. Terms
with initial capital letters in this Information Circular are defined in the
Glossary of Terms immediately following this Summary.
The Special Meeting of Empire Shareholders (the "Meeting")
Shareholders: Means holders of Empire Common Shares
Date: Friday, February 16, 2001
Time: 1:30 p.m. (C.S.T.)
Place: 7500 College Blvd., Suite 1215
Overland Park, KS 66210
Purpose: The Meeting has been convened to consider the
acquisition of Commonwealth by Empire and amendments
to Empire's Articles of Incorporation required to
effect the Acquisition.
The special meeting will be convened to consider and if thought fit, pass
resolutions to authorize the Empire Board of Directors to effect a merger
agreement (the "Merger" or "Acquisition") which will provide for the economic
acquisition by Empire of Commonwealth Energy Corp. ("Commonwealth") of White
Rock, British Columbia through a Merger Agreement under which existing Empire
Shareholders will effectively own approximately 73% of the merged consolidated
company subsequent to the transaction. The Merger Agreement if approved,
involves the automatic conversion by holders of the common shares of
Commonwealth ("Commonwealth Shareholders") of all their outstanding Commonwealth
Common Shares on a six-for-one basis for "exchangeable shares" of a
newly-incorporated Empire subsidiary, Empire Exchangeco Ltd., which shares are
exchangeable at the option of the holder on a one-for-one basis into common
shares of Empire ("Empire Common Shares"). Commonwealth Shareholders will
concurrently be issued redeemable Class B Redeemable Voting common shares (the
"Empire Voting Shares") in Empire (also on a six-for-one basis) so that they
will also have voting rights in Empire until they decide to exchange their
exchangeable shares for Empire Common Shares at which time Empire Class B Voting
Shares will be redeemed. Existing Holders of Commonwealth options and warrants
("Commonwealth Option Holders" and "Commonwealth Warrant Holders", respectively)
will receive equivalent securities in Empire, appropriately adjusted. As a
consequence of the merger Empire will become the parent company of Commonwealth.
The intent of Plan of Arrangement is to economically merge Empire and
Commonwealth with Empire as the surviving entity.
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THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING OF STOCKHOLDERS
We will hold a special meeting of stockholders on February 16, 2001, at
1:30 p.m., C.S.T. time, at our corporate headquarters, which are located at 7500
College Blvd., Suite 1215, Overland Park, Kansas 66210.
RECORD DATE AND OUTSTANDING SHARES
Holders of record of the outstanding shares of our Common Stock at the
close of business on January 9, 2001, the record date fixed for the meeting, are
entitled to notice of and to vote at the meeting. At the close of business on
the record date, there were 14,746,062 issued and outstanding shares of Common
Stock held by 699 holders of record.
VOTING RIGHTS; QUORUM AND VOTE REQUIRED
On all matters to be voted upon at the meeting and any adjournment or
postponement of the meeting, the holders of the Common Stock will vote as a
single class. Each record holder of Common Stock is entitled to one vote per
share. The presence, either in person or by properly executed proxy, of holders
of a majority of the outstanding shares entitled to vote will constitute a
quorum for the conduct of business at the meeting. For purposes of determining
the presence or absence of a quorum only, we intend to count as present at the
meeting and entitled to vote, stockholders of record who are present at the
meeting in person or by proxy and who abstain.
Stockholder approval of the transaction is required by Utah law because the
number of voting shares outstanding immediately after the merger will exceed by
more than twenty (20) percent the total number of voting shares of Empire
outstanding immediately before the merger. Under Empire's bylaws, the merger
must be approved by the affirmative vote of a majority of its shareholders
present, whether in person or by proxy, at the shareholder meeting.
PROXIES
You may vote your shares by attending the meeting and voting in person or
by marking the enclosed proxy card with your vote and dating, signing and
returning it in the enclosed postage-prepaid return envelope. The individual
named as proxy holder on the enclosed proxy card will vote all shares of Common
Stock represented at the meeting by properly executed proxies that are timely
received and not revoked according to the instructions marked on the proxies. If
you do not mark your instructions on your proxy, the proxy holder(s) will vote
your proxy for approval of the purchase and sale agreement and the transactions
contemplated by the purchase and sale agreement, except as otherwise provided in
this proxy statement. THE PROXIES ARE SOLICITED ON BEHALF OF OUR BOARD OF
DIRECTORS.
You may revoke your proxy at any time before it is voted. To revoke your
proxy you must:
- deliver to the Secretary of Empire before the meeting, or at the meeting
and before your shares have been voted, a written notice of revocation
bearing a later date than the proxy;
- properly execute a new proxy relating to the same shares which bears a
later date than the original proxy and deliver it to the Secretary of
Empire before the meeting, or at the meeting and before your shares have
been voted; or
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- attend the meeting and vote in person, although attending the meeting will
not in and of itself constitute revocation of your proxy.
You should deliver any written notice or subsequently dated proxy which is
intended to revoke an earlier proxy to the principal executive offices of Empire
Energy Corporation, 7500 College Blvd., Suite 1215, Overland Park, Kansas 66210,
Attention: Secretary.
The board of directors does not know of any matters other than those
described in the notice of the meeting that are to come before the meeting. If
any other business is properly brought before the meeting, including among other
things, a motion to adjourn or postpone the meeting to another time and/or place
for the purpose of soliciting additional proxies in favor of the proposal to
approve the purchase and sale agreement and the transactions provided for in the
purchase and sale agreement or to permit dissemination of information about
important developments relating to the purchase and sale agreement and the
transactions provided for in the purchase and sale agreement or otherwise
related to the meeting, one or more proxy holders named in the proxy card will
vote the shares represented by the proxy on those matters as determined in their
discretion.
SOLICITATION OF PROXIES AND EXPENSES
Empire will bear the entire cost of soliciting proxies from our
stockholders. We will furnish to brokerage houses, fiduciaries and custodians
holding in their names shares beneficially owned by others copies of
solicitation material to forward to the beneficial owners. Upon request, we will
reimburse persons representing beneficial owners of shares for their expenses in
forwarding solicitation material to the beneficial owners. We may supplement
original solicitation of proxies by mail with telephone or personal
solicitations by directors, officers or other regular employees of Empire. We
will not pay any additional compensation to our directors or officers or our
other regular employees for these services.
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DISSENTERS' RIGHTS
Under the Utah Revised Business Corporation Act ("URBCA"), the Empire
shareholders have the right to dissent from approving the merger transaction
(and the other matters that are subject to shareholder vote) by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation in anticipation of the transaction unless exclusion
would be inequitable) of such shares. In the event of disagreement between the
parties (Empire and the dissenting shareholder) on fair value, fair value may be
determined by the court in an action timely brought by the corporation.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
None of the directors or officers of, or any associate or affiliate of any such
person, has any material interest, direct or indirect, in the Merger other than
as an Empire Shareholder except as disclosed in this Information Circular.
Purpose and Benefits of the Acquisition of Commonwealth
The Board of Empire is proposing approval of the Merger Agreement by Empire
Shareholders to effectively acquire Commonwealth because management believes
that the combination of Empire and Commonwealth will be beneficial to Empire
Shareholders as the combined company will have a larger asset base, better
access to capital financing and better cash flow than Empire alone.
Principal Terms and Conditions of the Arrangement
The principal terms of the merger provide that at the effective time of the
merger (anticipated to be about February 28, 2001) all Commonwealth Shareholders
will be deemed to have exchanged their Commonwealth Common Shares on a
six-for-one basis for exchangeable shares (the "Exchangeable Shares") of a newly
incorporated Empire subsidiary ("Empire Exchangeco") and such Exchangeable
Shares will be exchangeable at any time chosen by the holder into publicly
traded common shares of Empire ("Empire Common Shares") on a one-for-one basis.
Commonwealth Shareholders will also be concurrently issued directly by Empire,
$0.0001 par value redeemable Class B Voting shares (the "Empire Voting Shares")
so that Commonwealth Shareholders will have voting rights equivalent to Empire
Common Shares until they elect to exchange Exchangeable Shares for Empire Common
Shares. Commonwealth Option Holders and Commonwealth Warrant Holders will
receive options and warrants in Empire, appropriately adjusted as to number and
exercise price (herein "Replacement Option" and "Replacement Warrants").
At the conclusion of the merger, subject to fulfilment of a number of legal
conditions (including shareholders' and judicial approvals) and business
conditions (U.S.$1.20 Empire Common Share price, minimum working capital and
hydrocarbon production for Empire), Commonwealth will become a controlled
subsidiary of Empire, to be renamed Empire Energy Canada Ltd. Commonwealth
Shareholders would hold, upon exchange of their Exchangeable Shares,
approximately 27% of the 20.2 million Empire Common Shares then outstanding and
17% if all 12.6 million convertible Empire securities were converted into Common
Shares at the same time as the 650,519 Replacement Options and, Replacement
Warrants of Empire issued to Commonwealth Option Holders and Commonwealth
Warrant Holders are exercised (and excluding the effect of an up to 2 million
Commonwealth share and warrant financing currently underway which may not be
completed in its entirety).
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Commonwealth Securityholders' Approvals
In order for the merger to become effective, the merger must be approved by an
affirmative vote of holders of not less than two-thirds (66-2/3%) of the
Commonwealth Common Shares represented in person or by proxy at a special
meeting to be held by Commonwealth on February 12, 2001. In addition, the
Arrangement must be approved by two-thirds of all Commonwealth Securityholders
(Commonwealth Common Shares plus holders of Commonwealth options and warrants).
If approved by the requisite majority of the Commonwealth Securityholders, there
are a number of other conditions to be met as noted above, including final court
approval, and approval by Empire's shareholders, before the acquisition of
Commonwealth by Empire will become effective.
Empire Shareholders' Approvals
In order to hold a shareholder vote on the Merger Agreement, a quorum of the
Empire shares must be represented in person or by proxy at the special meeting.
A quorum will exist so long as more than fifty percent of all of the Empire
shares entitled to vote on the Merger Agreement are present at the Shareholder
Meeting either in person or by proxy. In order for the Merger Agreement to
become effective, the Merger must be approved by an affirmative vote of holders
of a majority of the Empire Common Shares represented in person or by proxy at
the Meeting. If approved by the requisite majority of the Empire Shareholders,
there are a number of other conditions to be met as noted above, before the
acquisition of Commonwealth by Empire will become effective.
Canadian Court Approval
Provided that the merger is approved by the Commonwealth Securityholders and
certain other conditions are met, Commonwealth will make application for the
Final Order to the Court at 10:00 a.m. Calgary time, (or so soon thereafter as
Commonwealth's legal counsel can be heard) on February 14, 2001, in the Court of
Queen's Bench, Alberta, at the Courthouse, 611 4th Street, S.W., Calgary, AB.
The Final Order is not effective until filed with the Director appointed under
the CBCA and the Final Order will only be filed when all other conditions to
closing have been met. Any security holder or creditor of Commonwealth has the
right to appear at such hearing, be heard and present evidence if such person is
of the view that his or her interests are prejudiced by the merger.
Exchange of Share Certificates
If the merger is completed, Commonwealth Shareholders will be notified by a
letter of transmittal from the transfer agent of Commonwealth, the CIBC Mellon
Trust Company that they may tender their Commonwealth Share certificates and
obtain Exchangeable Shares and Empire Voting Shares in accordance with the
six-for-one exchange ratio. After completion of the merger, Commonwealth Common
Shares will be delisted from the Canadian Venture Exchange. Empire will directly
issue the Replacement Options and Replacement Warrants to the former holder of
Commonwealth options and warrants.
Timing
It is anticipated that the closing of the merger will occur on or about February
28, 2001; however, it is possible that closing may be delayed later than this
date if conditions to closing cannot be timely met in which event Empire will,
in consultation with Commonwealth, make a joint announcement updating the status
of the transaction.
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Fairness Opinion
Commonwealth has retained Ross Glanville & Associates, of Vancouver, B.C. to
provide an opinion respecting the fairness, from a financial point of view, of
the merger to the Commonwealth and Empire Securityholders. A copy of the
fairness opinion is attached to and forms part of this Information Circular as
Schedule G. The opinion concludes that the Arrangement terms are within a fair
range of exchange values and are fair from a financial point of view to the
holders of Commonwealth and Empire Shares.
United States Accounting Treatment of Merger
The transaction will be treated for financial accounting and reporting purposes
as a purchase of Commonwealth by Empire.
United States Income Tax Consequences
The transaction should not result in taxable gain to neither Empire nor its
shareholders.
United States Securities Laws Matters
The Merger should not impact the transferability of the shares held by Empire's
existing shareholders. The Empire Common Shares issued on conversion of the
Exchangeable Shares to former Commonwealth Shareholders should be free of resale
restrictions in the U.S. except for insiders (or "affiliates") of Empire
(including holders of 5% or more of Empire Shares as a consequence of the
merger) who will have some resale restrictions related to trading volumes.
Canadian Securities Laws Matters
Exchangeable Shares and Empire Voting Shares will be transferable but will not
be listed and hence will have little liquidity themselves. Empire Common Shares
received on exchange of the Exchangeable Shares will not be subject to resale
restrictions in British Columbia or Alberta except for restrictions of general
application. Empire and Commonwealth will seek discretionary securities
regulatory orders in other Provinces to have Empire declared a reporting issuer
so that the Empire Shares will be transferable in those Provinces although there
can be no assurances such orders will be issued. Commonwealth Shares are not
technically transferable in such other Provinces at this time and accordingly
Empire Common Shares are no less transferable.
Directors Recommendation
The directors of Empire unanimously recommend approval of the acquisition of
Commonwealth through the Merger on the basis that it is fair from a financial
point of view to shareholders of Empire and is in the best interests of Empire.
The directors of Empire based their decisions in part on reasons and conclusions
in the attached fairness opinion of a professional valuation expert whose report
is Schedule G hereto. The directors also considered that Commonwealth has a book
value which is greater than that of Empire and believes that when all factors
are considered including the value of the Commonwealth properties and its
currently greater cash flow that the Merger is fair to shareholders of Empire.
Glossary of Certain Terms
[The following is a glossary of terms and abbreviations used frequently
throughout this Information Circular and the Summary. Terms and abbreviations
used in the Schedules to this Information Circular are defined separately and
the terms and abbreviations defined below are not used therein, except where
otherwise indicated.]
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1933 Act means the United States Securities Act of 1933, as
amended.
ABCA means the Business Corporations Act (Alberta).
Arrangement means a "plan of arrangement" under section 192 of
the Canada Busines Corporations Act on the terms
and subject to the conditions set out in this Plan
of Arrangement subject to any amendments or
variations thereto made in accordance with the
terms of the Merger Agreement or made at the
direction of the Court in the Final Order.
Arrangement Resolutions means the special resolutions of Empire, to be
substantially in the form and content set forth on
Schedule D to this Information Circular.
CBCA means the Canada Business Corporations Act, R.S.C.
1985, C-44, as amended.
CDNX means the Canadian Venture Exchange, the stock
exchange where Empire shares are currently listed.
Certificate of Continuance means the certificate issued by the Director to
evidence the Continuance of Empire under the CBCA.
Commonwealth means Commonwealth Energy Corp., a corporation
existing under the ABCA as of the date of the
Merger Agreement but which is to continue as a
CBCA corporation prior to the Effective Time.
Commonwealth Common Shares means the outstanding common shares in the capital
of Commonwealth immediately prior to the Effective
Time.
Commonwealth Option Holder means a holder of options to purchase Commonwealth
Common Shares.
Commonwealth Shareholder means a holder of Commonwealth Common Shares.
Commonwealth Warrant Holder means a holder of Commonwealth Common Share
purchase warrants.
Commonwealth Transfer Agent means CIBC Mellon Trust Company, the registrar and
transfer agent for Empire Common Shares having an
address at 600 - 333 7th Avenue S.W., Calgary,
Alberta, T2P 2Z1 (phone (403) 232-2426, fax: (403)
264-2100, Attention: Robert Inkster).
Court means the Court of Queen's Bench of Alberta.
Director means Commonwealth's Directorate appointed under
the CBCA.
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Dissent Rights means the right of an Empire Shareholder to be
paid the fair value of his Empire Common Shares if
such shareholder objects to the Merger Agreement
and "dissents" as described herein.
Dissenting Shareholder means an Empire Common Shareholder who dissents in
respect of the Merger Agreement in strict
compliance with Schedule G.
Effective Date means the date the Final Order is filed with and
accepted by the Director providing such date
occurs on or prior to the Termination Date.
Effective Time means 12:01 a.m. Vancouver time on the Effective
Date.
Empire means Empire Energy Corporation, a corporation
existing under the laws of the State of Utah and
includes its affiliates.
Empire Common Shares means the voting common shares in the capital
stock of Empire.
Empire Voting Shares means redeemable Class B Redeemable Voting Shares
with US$0.0001 par value in the capital of Empire.
Empire Exchangeco means 3828395 Canada Ltd., a company formed under
the federal laws of Canada, and which is a
subsidiary of Empire.
Empire Holdings means 3828409 Canada Ltd., a company formed under
the laws of Canada which, at the time of the
consummation of the Arrangement, will be directly
or indirectly, a wholly-owned subsidiary of
Empire.
Empire Transfer Agent means Interwest Transfer Company, 1981 E. Murray
Holiday Road, Suite 100, Salt Lake City, Utah
84117 (telephone: (801) 272-9294.
Exchange Ratio means, subject to adjustment, if any, as provided
herein, six Commonwealth Common Shares for one
Exchangeable Share together with one Empire Voting
Share (options and warrants are adjusted in the
same ratio without Empire Voting Shares).
Exchange Trust Agreement means an agreement to be made between Empire,
Empire Exchangeco and the Trustee in connection
with the Plan of Arrangement substantially in the
form and content annexed to the Merger Agreement
and described in this Information Circular, with
such changes thereto as the parties to the Merger
Agreement, may agree.
Exchangeable Share means the rights, privileges, restrictions and
Provisions conditions attaching to the Exchangeable Shares,
which rights, privileges, restrictions and
conditions shall be substantially as set out in
Appendix 1 to Schedule A hereto.
Exchangeable Shares means the Series A non-voting, exchangeable shares
in the capital of Empire Exchangeco having
substantially the rights, privileges, restrictions
and conditions attaching to the Exchangeable Share
Provisions forming part of Schedule "A" hereto.
- 8 -
<PAGE>
Final Order means the final order of the Court approving the
Arrangement as such order may be amended by the
Court at any time prior to the Effective Date or,
if appealed, then, unless such appeal is withdrawn
or denied, as affirmed.
Interim Order means the interim order of the Court attached as
Schedule E, as the same may be amended, in respect
of the Arrangement, as contemplated by section 2
of the Merger Agreement.
ITA means the Income Tax Act (Canada), as amended.
Management means the Board of Directors of Empire.
Merger means the business combination of Empire and
Commonwealth that is effected by the Arrangement.
Merger Agreement means the agreement pursuant to which the
Arrangement is being effected and which is dated
the 12th day of December, 2000 between Empire,
Empire Exchangeco and Commonwealth, as it may be
amended, supplemented and/or restated in
accordance therewith prior to the Effective Date.
Paired Shares means the Exchangeable Shares and Empire Voting
Shares together.
Plan of Arrangement means the Plan attached to the Arrangement
Agreement to effect the Arrangement and forms part
of Schedule "A" hereto.
Record Date means for purposes of voting at the Meeting,
January 9, 2001.
Replacement Option means options in Empire being granted to holders
of Commonwealth options to replace them as
adjusted as for number and price in the Exchange
Ratio.
Replacement Warrant means warrants in Empire being granted to holders
of Commonwealth warrants to replace them as
adjusted as for number and price in the Exchange
Ratio.
SEC means the U.S. Securities Exchange Commission.
Support Agreement means that agreement to be entered into at the
Effective Time between Empire, Empire Holdings and
Commonwealth, as described in the Information
Circular, and which is described herein.
GENERAL PROXY INFORMATION
Solicitation of Proxies
This Information Circular is provided in connection with the solicitation by the
Directors of Empire of proxies for the Special Meeting of the Shareholders of
Empire (the "Meeting") to be held at its offices located at 7500 College Blvd.,
Suite 1215, Overland Park, KS, 66210, at 1:30 in the afternoon on February 16,
- 9 -
<PAGE>
2001. Empire Shareholders who do not hold their shares in their own name, as
registered shareholders, should read "Advice to Beneficial Shareholders" within
for an explanation of their rights.
The Board of Directors does not contemplate a solicitation of proxies otherwise
than by mail. The costs of the proxy solicitation will be born by Empire.
Appointment and Revocation of Proxies
A shareholder has the right to appoint a nominee (who need not be a shareholder)
to represent him at the Meeting other than Norman Peterson, who is the Chief
Executive Officer of Empire (the "Board Designee") and is designated in the
enclosed proxy form. To appoint a proxy other than the Board Designee, insert
the name of the proposed proxy holder in the blank space provided in the proxy,
and delete therefrom the name of the Board Designee or complete another proper
form of proxy. Such shareholder should notify the nominee of his appointment,
obtain his or her consent to act as proxy and should instruct him or her on how
the shareholder's shares are to be voted. The nominee should bring personal
identification with him to the Meeting. In any case, the form of proxy should be
dated and executed by the shareholder or by his attorney. Where a proxy is
signed on behalf of a shareholder by his proxy, the attorney must have written
authorization to act and the written authorization must be attached to the proxy
form.
A form of proxy will not be valid for the Meeting or any adjournment thereof
unless it is completed and delivered to Empire, at least forty-eight (48) hours,
excluding Saturdays and holidays, before the Meeting or any adjournment thereof.
Late proxies may be accepted or rejected by the Chairman of the Meeting in his
discretion. The Chairman is under no obligation to accept or reject any
particular late proxy.
In addition to revocation in any other manner permitted by law, a shareholder
who has given a proxy may revoke it, any time before it is exercised, by
instrument in writing executed by the shareholder or by his attorney authorized
in writing and deposited either at the registered office of Empire at any time
up to and including the last business day preceding the day of the Meeting, or
any adjournment thereof, at which the proxy is to be used, or with the Chairman
of such Meeting on the day of the Meeting or any adjournment thereof.
Advice to Beneficial Shareholders
Shareholders who do not hold their shares in their own name (referred to herein
as "Beneficial Shareholders") are advised that only proxies from registered
shareholders (i.e. shareholders of record) can be recognized, and only
registered shareholders may vote at the Meeting. Beneficial Shareholders who
complete and return a proxy must indicate thereon the name and address of the
person or company (usually a brokerage or brokerage clearing house) which holds
their shares as a registered shareholder. Every reasonable attempt will be made
to pass such proxies along to the appropriate registered shareholder in order
that the registered shareholder may vote in accordance with the wishes of the
Beneficial Shareholder. The form of proxy supplied to Beneficial Shareholders is
identical to that provided to registered shareholders.
All references to shareholders in this Information Circular and the accompanying
form of Proxy and Notice of Meeting are to shareholders of record (registered
shareholders) unless specifically stated otherwise. Where documents are stated
to be available for review or inspection, such items will be shown upon request
to registered shareholders who produce proof of their identity and
shareholdings.
- 10 -
<PAGE>
Voting of Proxies
The persons named in the enclosed form of proxy are directors or officers of
Empire and have indicated their willingness to represent as proxy the
shareholders who appoint them. Each shareholder may instruct his proxy how to
vote his shares by completing the blanks on the proxy form.
Shares represented by properly executed proxy forms in favor of the persons
designated on the enclosed form will be voted or withheld from voting in
accordance with the instructions made on the proxy forms. In the absence of
contrary instructions, such shares will be voted in favor of all matters
identified in the Notice of Meeting.
The enclosed form of proxy confers discretionary authority upon the persons
named therein with respect to amendments and variations to matters identified in
the Notice of Meeting and with respect to any other matters which may properly
come before the Meeting. At the time of printing this Information Circular, the
Board of Empire knows of no such amendments, variations or other matters to come
before the Meeting.
Voting Shares and Principal Holders Thereof
Empire is authorized to issue fifty million (50,000,000) shares of par value
stock at $.001 per share. As at the date of this Information Circular, being
January 16, 2001 Empire has 14,746,062 common shares issued and outstanding.
There are no other shares outstanding, of any class. The Common Shares are the
only shares entitled to be voted at the Meeting, and holders of Empire Common
Shares are entitled to one vote for each Empire Common Share held.
Empire's Transfer Agent has prepared a list of shareholders of record at the
close of business on January 9, 2001 (the "Record Date"). A holder of Empire
Common Shares named on that list will be entitled to vote the shares then
registered in such holder's name, except to the extent that (a) the holder has
transferred the ownership of any of his shares after the Record Date, and (b)
the transferee of those shares produces properly endorsed share certificates, or
otherwise establishes that he owns the shares, and demands not later than ten
(10) days before the day of the Meeting that his name be included in the list of
persons entitled to vote at the Meeting, in which case the transferee will be
entitled to vote his shares at the Meeting.
To the knowledge of the directors and senior officers of Empire, as at the
Effective Date, no person, firm or corporation beneficially owned, directly or
indirectly, or exercised control or direction over voting securities carrying
more than 10% of the voting rights attached to any class of voting securities of
Empire except as set out in the table below:
--------------------------------------------------------------------------------
Name and Municipality Number of Percentage of
of Residence Common Shares Common Shares
--------------------------------------------------------------------------------
Norman Peterson (Peterson & Sons 4,727,000 32%
Holding Company)
Overland Park, KS
--------------------------------------------------------------------------------
- 11 -
<PAGE>
<TABLE>
<CAPTION>
Empire Executive Compensation
During each of Empire's financial years ended December 31, 1999 and 2000, the
aggregate cash compensation paid or payable by Empire to its directors or senior
officers was $180,000.
The aggregate compensation for Empire's most recently completed financial years
(1999 and 2000) for the two Executive Officers (Norman Peterson, Chief Executive
Officer, and Bryan Ferguson, President) is less than $100,000 per year. There
are two Named Executive Officers of Empire, namely the Chief Executive Officer
and the President.
The compensation for the Named Executive Officers for Empire's three prior
financial years is as set out below:
=====================================================================================================================
Annual Compensation Long Term Compensation
-------------------------------- ------------------------------------
Awards Payouts
--------------------------- --------
Securities Restricted
Under Shares or All Other
Other Annual Options/SARs Restricted LTIP Compen-sation
Name and Principal Salary Bonus Compensation Granted Share Units Payouts ($)
Position Year ($) ($) ($) (#) ($) ($)
---------------------- ------- --------- ------- -------------- -------------- ------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Norman Peterson 1998 Nil Nil Nil N/A N/A N/A N/A
CEO 1999 Nil Nil Nil 25,000 Nil Nil Nil
2000 Nil Nil Nil Nil Nil Nil Nil
Bryan Ferguson 1998 N/A N/A N/A N/A N/A N/a N/A
President 1999 85,000 Nil Nil 250,000 Nil Nil Nil
2000 $85,000 10,000 Nil 100,000 Nil Nil Nil
Effective June 1999, Empire entered into an employment agreement with Mr.
Ferguson, Empire's President, pursuant to which Empire has agreed to pay Mr.
Ferguson the gross salary of $7,083 per month. Mr. Peterson is not paid a
salary. Empire has also agreed to reimburse Mr. Peterson and Mr. Ferguson for
reasonable expenses incurred on behalf of Empire in conducting their duties and
responsibilities as directors and officers of Empire.
No long-term incentive plan awards have been made to the Named Executive
Officers for Empire's most recently completed financial year or at any time.
The share options and share appreciation rights granted during the financial
year ended December 31, 2000, were as follows:
OPTIONS/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR 2000
===========================================================================================================
Market Value
of Securities
% of Total Underlying
Securities Under Options/SARs Options/SARs
Options/SARs Granted to Exercise or on the Date
Granted Employees in Base Price of Grant Expiration
Name (#) Financial Year ($/Security) ($/Security) Date
----------------------- ----------------- ----------------- ---------------- ----------------- ------------
Bryan Ferguson 100,000 100% $2.50 $1.00 June 2005
======================= ================= ================= ================ ================= ============
- 12 -
</TABLE>
<PAGE>
Share options were exercised by Bryan Ferguson during the financial year ended
December 31, 2000. Mr. Ferguson exercised a total of 10,000 options at an
exercise price of $1.00 per share. (Mr. Ferguson has not sold or otherwise
disposed of any of these shares.) There are no defined benefit or other benefit
plans in place.
Termination of Employment, Change in Responsibilities and Employment Contracts
There are no other employment contracts between Empire and any of the Named
Executive Officers, other than that named above.
There are no compensatory plan(s) or arrangement(s), with respect to the Named
Executive Officer resulting from the resignation, retirement or any other
termination of employment of the officers' employment or from a change of the
Named Executive Officers' responsibilities following a change in control.
Compensation of Directors
There are no arrangements under which directors were compensated by Empire and
its subsidiaries during the most recently completed financial year for their
services in their capacity as directors or consultants.
MATTERS TO BE ACTED UPON
1) MERGER WITH COMMONWEALTH ENERGY CORP.
Empire entered into a formal Merger Agreement dated December 12, 2000 (the
"Merger Agreement") with Commonwealth to effect an economic acquisition of
Commonwealth by Empire.
The Merger Agreement may be referred to as a "paired" exchangeable share
transaction which is schematically illustrated below. Commonwealth Common
Shareholders will receive under the Merger Agreement, Exchangeable Shares of a
newly incorporated special purpose company owned by Empire, Empire Exchangeco
Ltd. ("Empire Exchangeco"), which shares are exchangeable for Empire Common
Shares. Concurrently, Commonwealth Common Shareholders will be issued low par
value "redeemable" voting Class B common shares in Empire ("Empire Voting
Shares"), which together with Exchangeable Shares will be "paired", that is
treated together as a unit; (i.e. transferable and exchangeable only as a paired
unit). The Empire Voting Shares will be voting shares with respect to matters
upon which Empire Common Shareholders generally vote (election of directors,
fundamental changes and the like) but are not intended to have any economic
value (i.e. interest in Empire assets except the U.S.$.0001 nominal paid up
value). The Exchangeable Shares will be non-voting except with regard to matters
where a separate class vote is required by law but will, until exchanged into
Empire Common Shares, participate in the liquidation value of Empire Exchangeco
in the event of a wind up but only to the extent of being entitled to receive
one Empire Common Share per Exchangeable Share in satisfaction of any
liquidation right.
The paired shares are at any time at the option of the holder, exchangeable for
Empire Common Shares. The Exchangeable Shares will each be exchangeable (by
retraction by the holder) for one Empire Common Share and concurrently Empire
will redeem for par value of US$.0001 cash per share, an equal number of Empire
Voting Shares. The Exchangeable Shares will automatically be exchanged into
Empire Common Shares in the event only 100,000 Exchangeable Shares remain
outstanding or in case of an insolvency event, wind-up of Empire Exchangeco or
in the event of a merger, acquisition or sale of all or substantially all of the
assets of Empire where the holders of Exchangeable Shares should participate or
in any event by December 31, 2007. Under the terms of certain agreements related
to the Arrangement ("Related Agreements") more particularly described below,
- 13 -
<PAGE>
Empire and Commonwealth have certain rights to pre-empt a proposed retraction or
redemption and to purchase for a Empire Common Share all Exchangeable Shares
directly from the holders. This alternative results in substantially the same
economic effect on a holder of Exchangeable Shares (i.e. the holder receives a
Empire Common Share) but has different Canadian income tax consequences (see
"Canadian Federal Income Tax Considerations" below).
The Merger Agreement was negotiated by Empire and Commonwealth upon the premise
that Shareholders' interests of both companies would be enhanced by a
combination of the companies' activities primarily related to oil and gas
exploration. Management anticipates that after completion of the arrangement it
will merge Empire Exchangeco and Empire Energy Canada Ltd. (formerly
Commonwealth) into a single corporation (sometimes herein "Amalco"). No director
or officer of Empire holds any shares of Commonwealth.
- 14 -
<PAGE>
(1) (2)
BEFORE AFTER
ARRANGEMENT ARRANGEMENT
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
(3)
UPON CONVERSION OF
EXCHANGEABLES
[GRAPHIC OMITTED]
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Information of Empire (US$)
(unaudited using United States generally accepted accounting principles)
-------------------------------------------
Balance Sheet As of and for the As of and for the
-------------
9 mos. ended Sept. 12 mos. ended
30, 2000 Dec. 31, 1999
-------------------- -------------------
<S> <C>
Working Capital (deficit)..................................... $ 222,641 $ (354,979)
Long-term Assets.............................................. $ 234,329 $ 80,548
Total Assets.................................................. $ 500,355 $ (274,431)
Capital Stock................................................. $ 3,374,988 $ 1,989,417
Accumulated Deficit........................................... $ (2,918,018) $ (2,263,848)
Shareholders' Equity (deficit)................................ $ 456,970 $ (274,431)
Operating
---------
Income........................................................ $ 700,167 $ 79,548
Expenditures.................................................. $ 1,127,689 $ 657,283
Net Income (Loss)............................................. $ (427,522) $ (587,882)
Summary Financial Information of Commonwealth (Cdn.$)
(unaudited using Canadian generally accepted accounting principles)
As of and for As of and for the
the 9 mos. ended 12 mos. ended
Balance Sheet Sept. 30, 2000 Dec. 31, 1999
-------------
------------------ -------------------
Working Capital (deficit)..................................... (379,266) (360,636)
Long-term Assets.............................................. 5,343,310 4,670,911
Total Assets................................................... 5,582,039 4,801,703
Capital Stock................................................. 6,719,764 5,723,950
Accumulated Deficit........................................... (1,750,220) (1,408,174)
Shareholders' Equity.......................................... 4,964,043 4,310,275
Operating
---------
Income........................................................ 228,933 146,148
Operating Expenses............................................ 570,979 733,161
Net Income (loss)............................................. (342,046) (587,013)
- 16 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Recent Share Trading History of Commonwealth and Empire
Commonwealth Empire
(CDNX) (OTC Bulletin)
--------------------------------- --------------------------------
High Low Volume High Low Volume
2000 (by month) CDN$ US$
<S> <C> <C> <C> <C> <C> <C>
December 0.21 0.16 671,400 1.25 0.84 144,100
November 0.25 0.18 530,200 1.50 0.875 206,500
October 0.33 0.21 1,003,300 1.75 1.00 119,200
September 0.43 0.24 1,659,200 1.8125 1.1875 85,000
August 0.44 0.33 1,111,200 2.75 1.875 64,500
July 0.65 0.47 3,750,800 4.00 2.6875 212,400
June 0.50 0.39 2,306,900 3.375 1.6875 332,400
May 0.41 0.31 1,481,000 3.125 1.875 56,600
April 0.52 0.20 766,200 4.00 2.652 64,900
March 0.62 0.44 3,338,400 5.6875 4.25 254,400
February 0.52 0.31 3,582,900 5.125 2.875 163,300
January 0.39 0.22 1,456,700 2.75 1.375 80,100
1999 (by quarter)
----
Fourth Quarter 0.44 0.17 2,899,300 2.50(1) 1.50 81,500
Third Quarter 0.38 0.17 4,631,900 5.50 1.00 98,700
Second Quarter 0.30 0.18 2,784,900 4.0625 2.8125 15,700
First Quarter 0.45 0.17 2,534,100 Nil Nil Nil
Note:
1. 5:2 split October 1, 1999
A) Business of Commonwealth
Overview
Commonwealth is primarily engaged in the acquisition and exploration of
petroleum and natural gas properties in the United States.
Corporate History
Commonwealth was incorporated on December 14, 1987 and listed for trading on the
Canadian Venture Exchange (formerly the Alberta Stock Exchange) in 1997.
Commonwealth has two wholly owned subsidiaries, Blue Mountain Resources Inc. and
Commonwealth Energy (USA) Inc.
- 17 -
</TABLE>
<PAGE>
Properties
1. Wyoming Properties
The following are descriptions of Commonwealth's principal producing,
exploration and development properties located in the State of Wyoming, USA.
They are held by its wholly owned subsidiary Commonwealth Energy (USA) Inc.
(a) 7 Channel Sand Prospects, Powder River Basin, Weston County, Wyoming
Commonwealth owns a group of 7 Prospects located in the Powder River Basin in
Weston County, Wyoming. All of these Prospects are targeting the Fall River
(Dakota) Formation and are referred to as the Channel Sand Prospects.
Commonwealth purchased these 7 Prospects from a group of geologists in Wyoming
who completed geological studies from which they derived there to be potential
for economic hydrocarbons.
Commonwealth has signed an exclusive 5-year agreement with Electro Seise Inc. of
Fort Worth, Texas to employ their proprietary 3-D gravity/E geological survey
technology in the Powder River Basin of Wyoming. In the last two years Electro
Seise Inc.'s system, known as Differential GPS Hydrocarbon Surveys, has had an
87% success rate. They have completed their Airborne Survey on each of the above
mentioned Prospects and two test wells were drilled unsuccessfully to test
targets suggested by this survey.
(b) Beacon Prospect, Wyoming
Commonwealth has acquired a 100% interest in a 2,215.28 acre lease known as the
Beacon Prospect in Converse County, Wyoming. The Prospect is located a few miles
south of Douglas, Wyoming in T. 32 N., Rgs. 70-71 W. Commonwealth will retain a
25% working interest in this well and intends to farm out the balance.
Detailed correlation of the Canyon Springs interval shows two separate sandstone
units, with the upper sand completely pinching-out along the updip (south) edge
of the Prospect area. The lower, more massive sand persists southward to the
outcrop flanking LaBonte Anticline. A strong east-southeast plunging nose can be
documented with subsurface control, and parallels other structural noses to the
south associated with LaBonte Anticline. The upper Canyon Springs sand pinchout
crosses this plunging nose, forming the trap area. The oil column could exceed
700 feet.
Reservoir studies of other areas producing from the Canyon Springs sand confirm
the presence of a very high quality reservoir, with porosities commonly
exceeding 20% and permeabilities up to several hundred millidarcies. Secondary
objectives with shows in the immediate area include Jurassic marine sands above
the Canyon Springs, and the shallower Cretaceous Muddy, Dakota, and Lakota
sandstones. A 2,600 foot test well will evaluate the section through the Canyon
Springs sand objective. High gravity (40 degrees API) green oil is anticipated.
(c) The Seedy Draw Extension Prospect, Wyoming
Commonwealth holds a 45% working interest in 3,304 (1,486 net) acres in the form
of leases near the Giggs Thompson and Seedy Draw oil fields in the Weston and
Niobrara Counties. The lands lie in Townships 40 and 41N, Ranges 63 and 64W in
the Powder River Basin. In this area, regional stratigraphic dip is to the
southwest. Three oil-bearing target zones have been encountered in this area.
- 18 -
<PAGE>
The Upper Cretaceous Turner Sandstone, and the Lower Cretaceous Muddy and Dakota
reservoirs, have formed the principal prospects to date. These lands appear to
lie over Dakota channel sands.
(d) Double Dare Prospect (Powder River Basin, Wyoming)
The prospect is located in the heart of the Powder River Basin near the Sand
Dune field (discovered by Kerr McGee). This field has produced 30 Million
Barrels of Oil. The initial test well depth will be 12,000 feet with a potential
to produce 3 - 5,000 BOPD and 1-5 Million Cubic feet of gas per day.
This new exploration prospect is in the evaluation stage.
2. Texas Properties
The following are descriptions of Commonwealth's principal producing,
exploration and development properties located in the State of Texas, USA. They
are held by its wholly owned subsidiary Commonwealth Energy (USA) Inc.
(a) Bedsole Unit, Leon County, Texas
Commonwealth is the operator of and holds a 50% Working Interest in the 703.96
acre Bedsole Unit located in Leon County, Texas.
Commonwealth hired the engineering firm of William M. Cobb & Associates Inc.,
Worldwide Petroleum Consultants to do an Engineering and Economic study of the
existing well bore on the property. The study completed on April 1, 2000
analyzed the Bossier Zone at a depth of 14,140 feet, the Cotton Valley Sand Zone
at a depth of 12,738 feet, and the Travis Peak Zone at a depth of 9,370 feet.
The results of the Engineering Study indicate Natural Gas Reserves in this may
be in excess of 30 Billion Cubic feet of Gas with a net probable recovery in
excess of 12 Billion Cubic feet of Gas. This is the combined total of gas
reserves in the three zones behind casing in the well based on a 160-acre
spacing unit.
In addition 3D Seismic as well as Electro-Seise Inc.'s airborne Gravity Seismic
technology both indicate that there are two Pinnacle Reef potential drilling
targets contained within the 700-acre Bedsole Unit. The Bedsole Unit lies on
trend within 1.5 miles of two Reef discoveries. The Marshall A-1 discovery has
to date produced 90 Billion Cubic feet of Gas in 15 years and continues to
produce 10 Million Cubic feet of Gas per Day. The Poth Discovery has produced
more than 60 Billion Cubic feet of Gas from 2 wells and current production is
more than 20 Million Cubic feet of Gas per Day. Pinnacle Gas, a subsidiary of
Western Gas Pipeline have a 20-inch pipeline within 3,000 feet of the Amerada
Hess T-BAR-X Bedsole #1 well (Bedsole #1 well).
(b) Camp Colorado Prospect; Coleman County, Texas
Commonwealth is the operator of and holds a 39% working interest in the Camp
Colorado Prospect located in Coleman County, Texas.
Coleman County is situated in north central Texas and lies on the Bend Arch. The
Bend Arch is a region well known for its concentration of oil and gas fields.
This prospect is in the north east quarter of the county. Production in the
immediate area is primarily gas.
There are multiple target formations on the Prospect. The Duffer formation,
Caddo Limestone formation, and Marble Falls formation are 3 primary target
zones. Wells in the area drilled to each of the Duffer and Marble Falls
formations have produced in excess of 1 BCF of gas per well.
- 19 -
<PAGE>
Commonwealth has drilled 2 wells that are currently producing on the Prospect.
The Warren / Thurmond #1 well was successfully drilled and completed in July,
1999. The Warren / Thurmond #2 well was successfully drilled and completed in
January / February, 2000. Commonwealth is now putting together a further
development program for this Prospect.
(c) Old World Prospect, Parker County, Texas
Commonwealth owns a 50% working interest in the 3,000 acre Old World Prospect
located in Parker County, Texas.
An independent engineering report dated April 9, 1999 by Thos D. Humphery Oil
Properties, Inc. states that the 3,000 acre Old World field contains proven and
unproven gas reserves. The proved developed producing gross reserves of the 6
(six) wells currently producing are 844,980,000 cubic feet of gas. Furthermore,
the report states that there are an additional 716,361,000 cubic feet of gas in
gross reserves behind pipe in these 6 (six) wells. In addition to these proven
reserves, engineering opinions suggest the 3,000 acre prospect potentially
contains additional undeveloped gas reserves.
3. Oklahoma Properties
The following are descriptions of Commonwealth's principal producing,
exploration and development properties located in the State of Oklahoma, USA.
They are held by its wholly owned subsidiary Commonwealth Energy (USA) Inc.
(a) Oklahoma Johnston & Tyler Leases
Blue Mountain Resources Inc.; a wholly owned subsidiary of Commonwealth, holds a
50% working interest in Johnston and Tyler Lease (Contiguous), a 480 acre
project located in Washington County, Oklahoma, USA, near Bartlesville,
Oklahoma. The Johnston Lease produces oil from the Wayside sand formation from
four producing wells. A reserve analysis indicates Proved Producing Reserves:
178.1 MSTB and Proved Developed (non-producing) 90.0 thousand stock tank barrels
("MSTB"). The Tyler Lease produces oil from the Wayside and Bartlesville Sand
formations. There are a total of 29 existing wells on the property. Currently
(as of December, 1999), Commonwealth is implementing the BORS Lift System
technology to the wells on this Property. A Reserve Analysis indicates Proved
Producing: 222.9 MSTB and Proved Developed (Non-producing) 720 MSTB. Waterflood
has proven to be very successful in the area and as a result, additional
reserves have been allocated to the Tyler & Johnston Leases of 808 MSTB.
(b) Spring Creek, Oklahoma
Commonwealth holds a working interest in the Spring Creek field. At the moment,
no drilling is being conducted on this site. However, in the future there may be
further exploration conducted on this property.
Management Discussion & Analysis of Commonwealth
Financing Activities:
Commonwealth raised $650,000.00 Cdn in two private placements in 1999 and 2000.
The first was completed in July, 1999 raising $500,000.00 Cdn. The second was
completed between December, 1999 - March, 2000 and raised $150,000.00 Cdn. The
Company also raised $845,814.30 Cdn through the exercise of Warrants and Stock
Options. In addition, $1,023,048.70 US was raised through the selling of working
interests in 4 drilling projects completed between July, 1999 and April, 2000 in
Wyoming and Texas.
- 20 -
<PAGE>
An approximate total of $1,730,000.00 US was utilized to finance the various
purchasing, leasing, drilling, and completion activities of the Wyoming and
Texas projects listed below. The following is a summary of the drilling and
completion projects completed from January, 1999 to the present: (a) Camp
Colorado Prospect (Coleman County, Texas): Warren/Thurmond #1 Well Drilled
(July/August, 1999), Warren/Thurmond #2 Well Drilled (January/February, 2000);
(b) Old World Prospect (Parker County, Texas): Acquired (March, 1999), Byrd #1
Well Reentered and Completed (October, 1999); (c) Alkali Draw Prospect
(Wyoming): F24-5 Beltch Well Drilled (September, 1999); (d) Madren Draw Prospect
(Wyoming): Driscoll 22-19 Well Drilled (April, 2000); (e) Bedsole Unit (Leon
County, Texas): Bedsole #1 Well Completion Operations (July, 2000 - Present).
Field Operations:
Commonwealth made a natural gas discovery in Coleman County, Texas on the
Prospect known as Camp Colorado. Management anticipates a development program
for this 2,600 acre Prospect will be implemented in the next 12 months. Two
successful wells have been drilled on this prospect, the Warren/Thurmond #1 and
the Warren/Thurmond #2. They are each producing from two different formations.
The two formations where discoveries were made are known as the Caddo Limestone
and the Duffer formations. Both formations exist in each well. The wells have
been through an evaluation period and management has decided to open up the
alternate zones in each of the wells and then proceed with an initial 3-well
development drilling plan for the prospect. The estimated cost of this drilling
plan is $400,000.00 US.
The Bedsole #1 well on the Company's Bedsole Unit in Leon County, Texas is
currently undergoing completion operations in the Cotton Valley formation. The
estimated cost to complete the entire Cotton Valley zone is approximately $1
million US. A 3D Seismic study also suggests the potential of 2 Pinnacle Reef
targets on the Prospect. The Company will be completing an additional 3D Seismic
study and then will approach several larger oil and gas companies, offering them
the opportunity to participate in drilling for the Pinnacle Reef gas targets.
The cost to drill one Pinnacle Reef well is approximately $3 million US.
Therefore, the Company may finance this project by inviting a larger oil and gas
company fully finance the drilling and completion of the well for a portion of
the working interest.
A study will be completed on the 3,000 acre Old World Gas field in Parker
County, Texas to determine the most efficient development program to ensure
maximum recovery of the potential natural gas reserves. Currently there is
production from 6 wells. The results of the study will determine the necessary
capital investment needed to maximize daily production from this field.
Commonwealth's wholly owned subsidiary 638260 Alberta Inc. owns small Working
Interests and Royalty Interests in a group of 740 proven producing oil and
natural gas wells as well as several plant facilities and gas gathering
facilities throughout Alberta, Canada. The majority of the wells are located in
the Vermilion area of East Central Alberta. 90% of the 740 wells are designated
as natural gas wells. The portfolio of oil and gas assets are fully managed by
an intermediate operator, Signalta Resources Limited. Commonwealth purchased
638260 Alberta Inc. in December, 1999. The cash flow realized in 2000 from
638260 Alberta Inc. was $101,716.28 compared with monthly costs of approximately
$1,000.00.
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<PAGE>
In the Powder River Basin of Wyoming, Commonwealth owns ten Oil & Gas Prospects.
They are as follows:
1. Seedy Draw 6. West Hay Creek
2. Double Dare 7. Hay Creek
3. Beacon 8. Jim Creek
4. Alkali Draw 9. West Fork
5. Madren Draw 10. Lodgepole Creek
Management of Commonwealth believes that a 10 well drilling program is necessary
to evaluate the potential of further development programs on the 10 Wyoming
Prospects listed above. The costs to drill on each of these Prospects vary
according to the target formations depth. Drilling and Completion costs can
range from $150,000.00 to $500,000.00 US per well.
The estimated amount of capital that is needed to proceed with the development
plans on the Camp Colorado and Bedsole Prospects in Texas is approximately
$1,400,000.00 US. The estimated capital needed to properly assess the
development potential of the 10 Wyoming Prospects is approximately $3 million
US. Further studies are to be completed to evaluate the necessary capital
investment necessary to extract the hydrocarbon reserves of the Company's
Johnston & Tyler Lease in Oklahoma and the Old World Prospect in Texas.
B) Business of Empire
Introduction
Empire Energy Corporation ("Empire") is a reporting company under the US 1934
Securities Act whose common shares trade on the OTC bulletin board under ticker
symbol EECI.OB. The company is headquartered in Overland Park, Kansas (Kansas
City area). Empire was incorporated in November of 1983 in the state of Utah
under the name Medivest, Inc. Medivest engaged in various business enterprises
and eventually filed for protection under the bankruptcy laws. The company
emerged from bankruptcy and had its corporate charter reinstated in 1995 but
remained inactive until 1999. At that time Norm Peterson and his associates
acquired control by purchasing a majority of the then outstanding shares of
Empire. Empire has previously financed through the issuance of convertible
debentures (now converted) at $1.00 US per Empire share, raising $500,000 in
1999. On May 17, 1999, the shareholders of Medivest approved a change of name
from Medivest Inc. to Empire Energy Corporation (reverse merger) and Empire
commenced commercial activity in the oil and gas industry.
The company was subsequently reorganized with new management with the objective
of accumulating oil and gas production and properties at a time when oil and gas
prices were at 25-year lows. The primary prospect, at inception, was the
opportunity presented in the country of Nicaragua. In the interim, the company
began participating in an exploration program in Tennessee and realized its
first revenues from that program in late 1999. In November 2000, the company
acquired a working interest in a natural gas field in Texas. An overview of
these projects as well as the company's plan for growth is provided below.
Empire is engaged in oil and natural gas exploration, development and production
operations. Empire's operations primarily involve oil and gas exploration,
development and production in the Cumberland Plateau Region of north-central
Tennessee (Overton County). Empire is also expanding its operations into an
international setting and has recently focussed in the areas of Central America
and Africa. Empire owns 51% of Industria Oklahoma-Nicaragua, S.A., a Nicaraguan
company that has been legally, technically and financially qualified under
Nicaragua's 1998 Hydrocarbon law. The company is currently awaiting the opening
of a licensing round by the country in which it anticipates that a hydrocarbon
exploration concession will be granted. Empire has a 100% wholly-owned
subsidiary named Omega International, Inc., which operates in the country of
Ghana, West Africa. Operations in this subsidiary have been suspended pending
economic and political difficulties in the West African sub-region.
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Empire's corporate strategy is to expand its domestic reserve base through
acquisitions and additional exploration and developmental drilling under its
existing oil and gas exploration program and to reinvest a substantial portion
of the cash flow generated from its domestic operations to acquire or
participate in international prospects that have the potential for larger
petroleum reserves and greater revenues.
Empire's executive offices are located at 7500 College Boulevard, Suite 1215,
Overland Park, Kansas 66210 and its telephone number is (913) 469-5615. Empire
has three full time employees and utilizes a series of consultants to fulfill
other duties for the corporation. Those duties include: Investor Relations,
Public Relations, finance and accounting, legal services (SEC and tax law),
Central American politics & energy and, oil & gas engineering.
Exploration and Development Activities
Tennessee Exploration Program
In the third quarter of 1999, Empire signed an agreement to participate in a
Joint Venture Exploration Agreement with Pryor Oil Company of Parkville,
Missouri where Empire has a 60% working interest. Pryor Oil, an unrelated entity
whose Tennessee operations are based in Livingston, Tennessee, had been engaged
in the evaluation of large areas of central Tennessee, where Overton County is
located, to eastern Tennessee, where significant reserves of natural gas had
been reported to have been discovered by others. Pryor planned to establish
operations and explore for oil and gas in the north-central portion of the state
and engaged Empire in a Participation Agreement to conduct the exploration
program. In this program, Empire bears its share of the acquisition, drilling,
extraction and production costs incurred and Pryor Oil is responsible for
conducting and managing all drilling, production and marketing activities to
exploit the prospects. To date, this arrangement has worked well for Empire,
producing cash flows of $20,000 to $80,000 per month and providing a gross
profit on the investment. This prospect is characterized by very shallow
reserves (less than 2,000 feet), light sweet crude (41 gravity and low sulfur),
and favourable, available leasing conditions. Since initiating this project in
mid 1999, Empire has returned a profit on its investment and expects to continue
as such over this long-term development project.
The exploration program was developed under the concept of using
technology-based criteria to search for and locate oil and gas producing
reservoirs. Target reservoirs are all present in geologic formations that are no
deeper than 2,000 feet below ground surface. Of the current producing oil wells
in the program, oil production is from depths of 835 feet and 790 feet below
ground surface.
During the fiscal year ended December 31, 1999, domestic oil sales for Empire
from Tennessee included production during the fourth quarter only. A new field
discovery well was spud on September 9, 1999 and was brought onto production on
October 5, 1999. Total production from the field during this period (fourth
quarter, fiscal year 1999) was 6,577 barrels of oil. Total field production
through October 2000 was approximately 35,065 barrels. Sales from the program
are to Somerset Refinery, Inc., Somerset, Kentucky and represented 100% of
Empire's consolidated oil revenues at this time.
The program currently consists of the oil production and an estimated seven (7)
gas wells. In November 1999, an offset well was drilled which encountered
commercial quantities of gas but the well has been shut-in awaiting a market in
which to sell the gas. The second producing oil well in the program was spud in
fiscal year 2000 (January 25, 2000) and brought onto production on March 5,
2000. During the year 2000, the program drilled an estimated nine (9) wells with
approximately 70% encountering commercial quantities of hydrocarbons. The
production is characterized as a gas-driven, fractured porosity and, as such,
quantitative volumetrics of hydrocarbons cannot be reliably estimated. Initial
production data can be measured but due to the uncertainty of the nature and
extent of the fractures in which the hydrocarbons reside, including the aerial
extent, the total volume is unknown. To date, the three oil wells that have been
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<PAGE>
placed onto production have produced 15,000, 14,000 and 12,000 barrels of oil
respectively. In addition, the region has proven to be prolific in natural gas.
Approximately 70% of the wells drilled encounter significant natural gas.
Although there are currently no gas pipelines in which the gas can be delivered
to market, dialogue with pipeline companies was initiated in late 2000 with the
anticipation that a market may be available in 2001 in which the gas reserves
may be sold. The closest pipeline at the present time is located approximately
four miles from the company's gas reserves.
In so far as additional drilling targets are present on existing leases that are
held in the program, it is the desire to lease an extensive land block (32,000
acres) in a region located to the east of the current program drill sites. This
acreage is believed to be host to deeper, more extensive formations. Operating
costs to drill and produce on the acreage is expected to increase however,
production of oil and gas is expected to increase as well. Additionally, gas
pipelines are present in the vicinity providing an immediate market in which to
sell any production that is encountered. In 2000, Empire expended an estimated
$186,000 in the program and realized revenues of approximately $413,000. The
average cost to Empire to drill a producing well in this program was $42,000
including completion costs. Moreover, the dry hole costs averaged approximately
$12,000 per well.
The initial exploration activity has resulted in an improved exploration
database and the program is actively engaged in a leasing and exploration
program to expand activities and prospects in the region. Moreover, the operator
is currently conducting an expanded seismic shoot in an effort to further
understand the geology of the region using existing wells and existing
production horizons as control points. Planned activities include the drilling
of additional wells during the year 2001.
Nicaraguan Exploration Activities
Empire has a 51% ownership in Industria Oklahoma-Nicaragua S.A., a company that
has been technically, legally and financially qualified by the government of
Nicaragua to conduct oil exploration under a new law (circa 1998) in that
country. Industria Oklahoma-Nicaragua, S.A. along with Empire and other members
of the consortium are actively pursuing the execution of a contract with the
government of Nicaragua for a contract (oil and gas concession) allowing the
firms the rights to explore on a substantial acreage block, never before
explored in the Central American nation. In management's view, Nicaragua has not
been adequately explored and data suggests that this land mass may be host to
hydro-carbons. Empire management has travelled to the country, representatives
have met with officials and an ongoing dialogue between energy ministry
officials and company representatives are continuing. It is anticipated that
once the licensing round is officially opened by the government, the consortium
will be granted a concession. Plans are being evaluated to joint venture with a
moderate to large independent oil company to fully exploit this prospect. There
are four other oil companies and three individuals that own the balance of the
49% of Industria Oklahoma-Nicaragua S.A. not owned by Empire.
Due to the sensitive nature of the process, Empire has been directed by its
consultants in the U.S. and in Nicaragua to limit public dissemination of
projections and potential success related to this project. As such, Empire has
chosen not to exploit or fully recognize all of the characteristics or
fundamentals related to its potential. Empire has been involved in and working
towards this concession for a period of nearly two years. Total funds expended
to date are approximately $250,000 and if the concession is granted, Empire's
portion of the cost to drill a first well would be approximately $1 million US.
Texas Natural Gas Prospect
Empire acquired a 44.6% working interest in a 704-acre lease located in Leon
County, Texas of which Empire currently owns 50%. The Bedsole lease has one
well, drilled by Amerada Hess to 16,300 feet deep, completed and logged. Seismic
information suggests that there are two pinnacle reef structures present on the
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<PAGE>
lease that could be host to hydrocarbons. Similar structures in the area have
produced in excess of 30 BCF. A 20" gas pipeline is present within 3000 feet of
the well. Empire will acquire an additional 50% working interest in the lease at
the close of the Empire transaction and will become the operator of the lease.
It is anticipated that once Empire owns 93% or greater that the opportunity to
do a farm-out for drilling the reefs will be increased significantly.
Empire does not have formal reserve reports on its properties and does not claim
to have any "proven reserves".
Other Activities
In February 2000, the company acquired all of the outstanding common stock of
Omega International, Inc. (Omega) for 560,000 shares of the company's common
stock. The transaction was accounted for as a pooling of interests. Omega is
focussed on business opportunities in Africa, primarily the purchase and resale
of minerals in Ghana. Activities in this subsidiary have been suspended due to
the depressed price of gold on the international marker as well as the economic
and political unrest in the West African sub-region. Messrs. Ferguson and
Garrison received 20,000 Empire shares each as part of the transaction in that
they sold their interests in Omega to Empire.
In April 2000, the company acquired substantially all of the assets of Talisman
Marketing, Inc. for 562,150 shares of the company's common stock. The objective
of this acquisition was to build a "non-energy" business unit as well as to
build the asset base of the company.
In June 2000, the company acquired a majority ownership interest in One E Group,
Inc. in exchange for a total of 846,667 shares of the company's common stock.
The objective of this acquisition was an attempt to continue construction of the
"non-energy" business unit. In August 2000, One E Group lost the services of
critical personnel and key proposed contracts and, as a result, the company
discontinued operations and liquidated equipment and assets in settlement of
corporate liabilities. Subsequently, the company sold its investment in One E
Group and any claims the company may have against the sellers and received back
750,000 shares of Empire common stock in payment.
Prior Sales of Securities
A summary of Empire Shares issued in the previous 12 months is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Number of Issued
Date Securities Purpose Price per Share Total Consideration
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Feb., 2000 560,000 Omega acquisition $0.50 $ 280,000
----------------------------------------------------------------------------------------------------------------------
Apr., 2000 562,150 Talisman Marketing $0.50 $ 281,075
acquisition
----------------------------------------------------------------------------------------------------------------------
June, 2000 96,665 One E Group acquisition $0.75 $ 72,500
----------------------------------------------------------------------------------------------------------------------
Dec., 2000 1,784,000 Bedsole Unit Interest $0.55 $1,338,000
----------------------------------------------------------------------------------------------------------------------
Mar., through
April 342,500 Conversion of debentures $1.00 $ 342,500
----------------------------------------------------------------------------------------------------------------------
Mar., through
July 160,000 Exercise of Options $0.60 to $1.00 $ 160,000
----------------------------------------------------------------------------------------------------------------------
Various 131,820 Other issuances $1.00 to $3.00 $ 343,420
----------------------------------------------------------------------------------------------------------------------
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</TABLE>
<PAGE>
Material Agreements:
Pryor Oil Co.: Participation Agreement - The agreement dated August 6, 1999
between Pryor Oil Co. and Empire provides for Empire to participate in the
Tennessee drilling program on a 60% working interest basis. Empire has the
option to participate on a well by well basis with no obligation to proceed,
allowing it the opportunity to review technical data for each proposed well
and/or completion.
Industria Oklahoma-Nicaragua, S.A.: Participation Agreement - The agreement
dated April 24, 1999 between Industria Oklahoma-Nicaragua, S.A. and Empire
provides for Empire to fund approximately 67% of the costs through the first
well estimated at US$1.5 million. As such, Empire has and will continue to fund
all activities related to obtaining the concession and their proportionate share
of drilling the first well.
Mike Cunniff: Consulting Agreement - The agreement provides for Mr. Cunniff to
provide consulting services related to market conditions, investor relations and
public relations. The terms of the agreement are as follows: six-month term
(September 2000 through February 2001), $1,500 per month fee, 2,000 options per
month at an exercise price of $2.00 per share.
C) Income Tax Considerations
U.S. Taxpayer Information
The acquisition of the Commonwealth Common Shares by Empire in exchange for
Exchangeable Shares should not result in a taxable transaction to Empire or its
shareholders.
D) Securities Laws Matters
U.S. Securities Law Information
The issuance of Exchangeable Shares and Empire Voting Shares to Commonwealth
Shareholders will not be registered under the 1933 Act. Such shares will instead
be issued either (i) in reliance upon the exemption provided by Section 3(a)(10)
of the 1933 Act or (ii) in reliance upon exemptions from registration provided
by Regulation S or Rule 506 of Regulation D of the 1933 Act.
Section 3(a)(10): Section 3(a)(10) exempts securities issued in exchange for one
or more outstanding securities from the general requirement of registration
where the terms and conditions of the issuance and exchange of such securities
have been approved by a recognized court, after a hearing upon the fairness of
the terms and conditions of the issuance and exchange at which all Persons to
whom such securities will be issued have the right to appear. The Court is
authorized to conduct a hearing to determine the fairness of the terms and
conditions of the Arrangement, including the proposed issuance of securities in
exchange for other outstanding securities. The Court entered the Interim Order
on January 8, 2001 and, subject to the approval of the Arrangement by
Commonwealth Securityholders, a hearing on the fairness of the Arrangement will
be held on February 14, 2001 by the Court. See "The Arrangement - Court Approval
and Completion of the Arrangement".
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<PAGE>
The Exchangeable Shares and Empire Voting Shares received in exchange for
Commonwealth Common Shares in the Arrangement in reliance upon the exemption
provided by Section 3(a)(10) will be freely transferable under United States
federal securities laws, except for such shares held by persons who are deemed
to be "affiliates" (as such term is defined under the 1933 Act see below) of
Commonwealth prior to the Arrangement which may be resold by them only in
transactions permitted by the resale provisions of Rule 145(d)(1), (2), or (3)
promulgated under the 1933 Act or as otherwise permitted under the 1933 Act. In
the event Empire Common Shares are publicly listed, Rule 145(d)(1) generally
provides that "affiliates" of Commonwealth may sell securities of Empire
received in the Arrangement if such sale is effected pursuant to the volume,
current public information and manner of sale limitations of Rule 144
promulgated under the 1933 Act, including Regulation S thereunder.
Rule 144 limitations generally require that any sales in any 3 month period made
by a securityholder who is subject to such limitations shall not exceed the
greater of 1% of the outstanding shares of the securities being sold or the
average weekly trading volume over the 4 calendar weeks preceding the placement
of the sell order and that such sales be made in unsolicited, open market
"brokers transactions". Rules 145(d)(2) and (3) generally provide that the
foregoing limitations lapse for non-affiliates of Empire after a period of 1 or
2 years, respectively, depending upon whether certain currently available
information continues to be available with respect to Empire. Persons who may be
deemed to be affiliates of an issuer generally include individuals or entities
that control, are controlled by, or are under common control with, such issuer
and may include certain officers and directors of such issuer as well as
principal shareholders of such issuer. Under Rule 904 of Regulations S, persons
who are not "affiliates" of Empire (or who are affiliates of Empire solely by
virtue of holding a position as an officer or director of Empire) may sell
Exchangeable Shares if no "directed selling efforts" (as defined in Rule 902 of
Regulation S) are made by the seller or any of its affiliates or any person on
their behalf, no offer is made to a person in the United States, and either (i)
at the time the buy order is originated, the buyer is outside the United States,
or the seller and any person acting on behalf of the seller reasonably believes
the buyer is outside the United States, or (ii) the transaction is executed in,
on or through the facility of a recognized Stock Exchange and neither the seller
nor any person acting on behalf of the seller knows that the Transaction has
been pre-arranged with a buyer in the United States. In the case of sales by a
person who is an officer or director of Empire and is an affiliate of Empire
solely by virtue of holding that position, no selling concession, fee or other
remuneration may be paid in connection with the offer or sale other than the
usual and customary broker's commission that would be received by a person
executing the transaction as agent. Additional conditions apply to resales by
persons who are affiliates of Empire other than by virtue of holding a position
as an officer or director of Empire. There will be no listing of Exchangeable
Shares or Empire Voting Shares upon completion of the Arrangement or in the
foreseeable future.
The Empire Common Shares issued by Empire upon the exchange of the Exchangeable
Shares, in accordance with the terms of the pairing agreement, will be issued in
reliance upon the exchange exemption provided for in Section 3(a)(9) of the 1933
Act. Section 3(a)(9) exempts securities issued in exchange by the issuer with
its existing securities holders exclusively where no commission or other
remuneration is paid or given directly or indirectly for soliciting such
exchange. The Empire Common Shares issued in exchange for the Exchangeable
Shares should be freely transferable under United States federal securities
laws, in the same manner and subject to the same limitations as the Exchangeable
Shares and Empire Voting Shares.
Regulation S and Rule 506 of Regulation D: In the event that the issuance of
Exchangeable Shares and Empire Voting Shares to Commonwealth Shareholders cannot
be issued in reliance upon the exemption provided by Section 3(a)(10) of the
1933 Act, the Exchangeable Shares and the Empire Voting Shares will be issued
(i) to non-U.S. persons outside the United States pursuant to an exemption from
registration provided by Regulation S and (ii) to U.S. persons or persons in the
United States in reliance upon an exemption from registration under Rule 506 of
Regulation D under the 1933 Act, in such an event Commonwealth Shareholders
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<PAGE>
shall be required to make certain representations and warranties in connection
with the issuance of the Exchangeable Shares and the Empire Voting Shares .
Exchangeable Shares and the Empire Voting Shares issued in reliance upon
exemptions from registration under Regulation S and Rule 506 of Regulation D
will not be freely tradable and may not be offered for sale, sold or otherwise
transferred or assigned for value, directly or indirectly, unless registered
under all applicable United States federal and state securities laws or in a
transaction that complies with an applicable exemption from registration under
the 1933 Act, such as that provided by Rule 144 or Rule 904, and other
applicable securities laws. In general, under Rule 144 as currently in effect, a
Commonwealth Common Shareholder who has beneficially owned the securities for at
least one year and who is not an affiliate would be entitled to sell such
securities, subject to the Rule 144 limitations described above.
Empire Common Shares are anticipated to be issued by Empire in exchange for the
Exchangeable Shares in reliance upon the exchange exemption provided for in
Section 3(a)(9) of the 1933 Act. Commonwealth Common Shares issued in exchange
for the Exchangeable Shares in reliance upon Section 3(a)(9) should have the
same restrictions on resale as were applicable to the Exchangeable Shares,
described above, and have the same applicable holding period for the purposes of
Rule 144.
This summary is of a general nature only and is not intended to be, and is not
to be construed as, securities resale advice to any particular Holder.
Accordingly, each Holder is urged to consult the Holder's own professional
advisors with respect to the particular tax and legal implications of the
Arrangement to such Holder. Except as otherwise expressly stated, this summary
does not take into account any provincial, state, "bluesky" territorial or
foreign tax law or treaty.
E) Procedure for the Arrangement Becoming Effective
Procedural Steps
The Arrangement is proposed to be carried out pursuant to s.192 of the CBCA. The
following procedural steps must be taken for the Arrangement to become
effective:
(a) the Arrangement, whether without amendment, must be approved by a
majority in number of Commonwealth Common Shareholders representing
not less than two-thirds of the votes of Commonwealth Common
Shareholders and two-thirds of votes of Commonwealth Securityholders
who are present and vote either in person or by proxy at the Meetings,
all in compliance with the Interim Order of the Court;
(b) upon the other conditions contained in the Merger Agreement being
satisfied or waived, Commonwealth will apply for the Final Order of
the Court approving the Arrangement. The other principal conditions to
which the completion of the Arrangement is subject are that there are
no significant numbers of Commonwealth dissent rights exercised. Also,
Empire Common Shares must trade at US$1.20 per share, Empire must have
US$100,000 in working capital and have daily production of 150 barrels
of oil in the previous 30 days and CDNX or Amex must have
conditionally listed Empire Common Shares, although all or any of
these conditions may be waived by Commonwealth in its discretion in
whole or in part;
(c) all other consents, orders, regulations and approvals, required or
necessary or desirable for the completion of the Arrangement shall
have been obtained or received from the authorities or bodies having
jurisdiction in the circumstances;
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<PAGE>
(d) there shall not be in force any order or decree restraining or
enjoining the consummation of the Arrangement;
(e) the Merger Agreement must be approved by a majority of Empire
shareholders present, either in person or represented by proxy,
constituting a quorum at its Special Shareholders Meeting ,called for
the purpose of voting on the Merger Agreement; and
(f) the Arrangement shall have been made effective in law by filing
the Final Order with the Director under the CBCA and the issuance of
certificates giving effect to the Arrangement.
Canadian Court Approval
Canadian law provides that the merger requires approval of the Canadian Court.
The Court has broad discretion under the Act when making orders in respect of
the merger and that the Court may approve the merger either as proposed or as
amended in any manner the Court may direct, subject to compliance with such
terms and conditions, if any, as the Court thinks fit. Depending on the nature
of such possible amendments, Commonwealth or Empire may not be obligated to
complete the merger.
The Final Order will constitute the basis for an exemption from certain
requirements under the 1933 Act, with respect to the Empire Common Shares and
Voting Shares of Empire to be issued to former Commonwealth Shareholders and
options and warrants to purchase Empire Shares to be issued to holders of
Commonwealth options and warrants under the merger. The Court will be advised,
prior to the hearing, that if the terms and conditions of the merger are
approved by the Court, the Commonwealth Shares issued or exchanged for
Exchangeable Shares pursuant to the merger will not be registered under the 1933
Act in reliance on an exemption provided by Section 3(a)(10) thereof.
Timing
It is not possible, however, to specify for certain when the Effective Date will
occur. If the merger does not become effective on or before February 28, 2001,
the Merger Agreement may be terminated at the election of either Empire or
Commonwealth.
Merger and Related Agreements
The following agreements related to the Merger will be available for inspection
by shareholders at the Meeting (and will be supplied before the Meeting to any
Empire Shareholder requesting a copy of same by contacting Empire).
(a) Merger Agreement
The Merger Agreement made December 12, 2000 is between Commonwealth, Empire and
Empire Exchangeco Ltd. ("Empire Exchangeco") as it may be amended from time to
time, is the agreement pursuant to which the Plan of Arrangement is an appendix.
The Merger Agreement provides certain mutual representations of the parties as
to valid incorporation, good standing and authority to enter into the
Arrangement. The Merger Agreement provides that each of the parties will carry
out its obligations under the Merger Agreement and also provides for certain
conditions (see "Procedural Steps" above) to completion of the Arrangement as
well as provisions dealing with the amendment and termination of the
Arrangement.
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<PAGE>
(b) Support Agreement
Under the terms of the Support Agreement to be entered into concurrently with
the Arrangement completion Empire, Empire Exchangeco and an affiliate of Empire
Exchangeco will provide for certain protections for the holders of Exchangeable
Shares as well as provisions ensuring the appropriate pairing of Exchangeable
Shares with Empire Voting Shares. Under the Support Agreement, Empire agrees
that it will not declare any dividend on its common shares unless Empire
Exchangeco is able to simultaneously declare an equivalent dividend on the
Exchangeable Shares and provides generally for economic equivalence between the
Exchangeable Shares and the Empire Common Shares. Accordingly, Empire will not
without the prior approval of the Exchangeable Shares issue or distribute any of
its common shares or convertible shares to the holders of Empire Common Shares
by way of a stock dividend or like distribution nor will it subdivide,
reclassify or otherwise change the Empire Common Shares or effect an
amalgamation, merger or like transaction affecting Empire Common Shares unless
the same or economically equivalent change shall simultaneously be made to the
Exchangeable Shares. In the event of a tender offer for shares of Empire, Empire
will ensure that the Exchangeable Shares can participate in such transaction and
Empire will not vote any Exchangeable Shares which it acquires. Empire and
Empire Exchangeco will ensure that all Exchangeable Shares and Redeemable Shares
are dealt with as paired shares and accordingly will only be transferred in
pairs and in the event of an exchange for Empire Common Shares, Empire will
redeem on a one-for-one basis the Empire Voting Shares.
(c) Exchange Trust Agreement
The Exchange Trust Agreement will be made concurrently with completion of the
Merger and will be made between Empire, Empire Exchangeco and Commonwealth's
solicitors as trustees (with full right of assignment). Under the Exchange Trust
Agreement Empire has granted and declared a trust for the benefit of holders of
Exchangeable Shares that in the event of any Insolvency Event (as defined) which
affects Empire Exchangeco's ability to redeem Exchangeable Shares for Empire
Common Shares that Empire will purchase from each holder of an Exchangeable
Share in consideration of the issuance of a Empire Common Share, all such
holder's Exchangeable Shares on a one-for-one basis. The purpose of the Exchange
Trust Agreement is to improve the continued right of holders of Exchangeable
Shares to exchange such shares for Empire Common Shares and participate in any
liquidation of Empire in the event of an insolvency of Empire Exchangeco which
would otherwise impede their exchangeability under general insolvency laws.
(d) Rights and Restrictions of Exchangeable Shares
The rights and restrictions of the Exchangeable Shares are an appendix to
Schedule "A" hereto and provide in detail the redemption and retraction rights
applicable to the Exchangeable Shares as well as the mechanics pursuant to which
they are to be exchanged for Empire Common Shares. The Exchangeable Shares are
generally exchangeable into Empire Common Shares at any time at the option of
the holder but may be required to be exchanged in the event of a decision by the
majority of the holders thereof to effect the exchange and certain other events.
All Exchangeable Shares must be exchanged not later than December 31, 2007.
- 30 -
<PAGE>
(e) By-Laws of Empire Exchangeco and Empire
Empire Exchangeco and Empire will have bylaws which will govern such matters as
shareholders' meetings, election and removal of directors and officers,
corporate records, share certificates and seals. Copies of the by-laws will be
available at the Meeting.
Exchange of Share Certificates
If the Arrangement becomes effective, as soon as practicable after the Effective
Date, Empire or its share registrar and transfer agent will send a transmittal
letter to each former holder of Commonwealth Common Shares pursuant to which
such former shareholders will be entitled to exchange their certificates
formerly representing Commonwealth Common Shares for certificates representing
Empire Exchangeco Shares and Empire Voting Shares.
F) Risk Factors and Additional Information
(i) Forward-Looking Information
Certain statements in this Information Circular are "forward-looking statements"
within the meaning of the United States Private Securities Reform Act of 1995.
Any statements that express or involve discussions with respect to predictions,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, using words and phrases such as "intend",
"intends", "believe", "believes", "will be expected", "estimates", "is
estimated", "plans", "anticipates", "is anticipated" or stating that certain
actions, events or results "will", "may" or "could" be taken, occur or be
achieved) are not statements of historical fact and may be "forward-looking
statements". Such statements are included, among other places, in the section
entitled "Merger with Commonwealth Energy Corp. By Plan of Arrangement",
"Business of Empire", "Business of Commonwealth", subsections of the section
entitled "Particulars of Extraordinary Matters To Be Acted Upon" and the section
entitled "Risk Factors." Forward-looking statements are based on expectations,
estimates and projections at the time the statements are made that involve a
number of risks and uncertainties which could cause actual results or events to
differ materially from those anticipated by Empire or Commonwealth.
(ii) Additional Information for Shareholders of Empire
The pro forma financial statement of Empire and other financial information
contained in this Information Circular have been prepared in accordance with
United States generally accepted accounting principles may differ in certain
material respects from Canadian generally accepted accounting principles.
Accordingly, such financial information may not be comparable to financial
information of Canadian companies, prepared under Canadian generally accepted
accounting principles.
No person has been authorized to give any information or make any representation
not contained in this Information Circular and, if given or made, such
information or representation shall not be relied upon as having been
authorized. This Information Circular does not constitute an offer to sell or a
solicitation of an offer to purchase any securities in any jurisdiction where,
or to any person to whom, it is unlawful to make such offer or solicitation.
Neither the delivery of this Information Circular nor any distribution of the
securities described herein shall, under any circumstances, be deemed to create
an implication that there has been no change in the facts herein set out since
the date hereof or that the facts are correct as of any time subsequent to that
date.
- 31 -
<PAGE>
(iiv) Risk Factors
Business Risks
Commonwealth must continually acquire or explore for and develop new oil and gas
reserves. Without successful drilling or acquisition ventures, Commonwealth's
oil and gas assets, properties and the revenues derived therefrom will decline
over time. To the extent Commonwealth engages in drilling activities, such
activities carry the risk that no commercially viable oil or gas production will
be obtained. The cost of drilling, completing and operating wells is often
uncertain. Commonwealth will require significant additional funding which may
not be available to it and which if received will result in dilution to its
shareholders. Drilling may be curtailed, delayed or cancelled as a result of
many factors, including shortage of available working capital, title problems,
weather conditions, environmental concerns, shortages of or delays in delivery
of equipment, as well as the financial instability of well operators, other
working interest owners and drilling and well servicing companies. The
availability of a ready market for Commonwealth's oil and gas depends on
numerous factors beyond its control, including the demand for and supply of oil
and gas, the proximity of Commonwealth's crude oil and natural gas reserves to
pipelines, the capacity of such pipelines, fluctuations in seasonal demand, the
effects of inclement weather, and government regulation. New oil and gas wells
may be shut-in for lack of a market until a gas pipeline or gathering system
with available capacity is extended into the area.
Operating Hazards and Uninsured Risks
The operations of Commonwealth are subject to the inherent risks normally
associated with exploration for and production of oil and gas, including
blowouts, cratering, pollution, environmental liabilities and fires, each of
which could result in damage to or destruction of oil and gas wells or
production facilities or damage to persons and property. As is common in the oil
and gas industry, Commonwealth is not fully insured against all of these risks,
either because insurance is not available, because Commonwealth has elected to
self-insure due to high premium costs or for other such reasons relating to a
lack of appropriate insurance coverage. The occurrence of a significant event
that is not fully insured against could have a material adverse effect on
Commonwealth's financial condition.
Environmental Regulation
Commonwealth's operating activities are subject to various federal, state, and
local laws and regulations covering the discharge of material into the
environment or otherwise relating to protection of the environment. In
particular, Commonwealth's oil and gas exploration, development, production, its
activities in connection with storage and transportation of liquid hydrocarbons
and its use of facilities for treating, processing, recovering, or otherwise
handling hydrocarbons and wastes therefrom are subject to stringent
environmental regulation by governmental authorities. Such environmental laws
and regulations may increase the costs of planning, designing, drilling,
installing, operating and abandoning Commonwealth's oil and gas wells and other
facilities.
Competition
The oil and gas industry is highly competitive in all its phases. Competition is
particularly intense with respect to the acquisition of desirable producing
properties and the sale of crude oil and natural gas production. Commonwealth's
competitors in oil and gas exploration, development and production include major
oil companies and numerous independent oil and gas companies, and individual
producers and operators. Many of its competitors possess and employ financial
and personnel resources substantially greater than those that are available to
Commonwealth and may, therefore, be able to pay greater amounts for desirable
leases and to define, evaluate, bid for and purchase a greater number of
producing prospects than the financial or personnel resources of Commonwealth
will permit. Commonwealth will also complete for additional financing as its
operations will need additional capital to be successful.
- 32 -
<PAGE>
Regulation
The production of oil and gas is subject to extensive federal and state laws,
rules, orders and regulations governing a wide variety of matters, including the
drilling and spacing of wells, allowable rates of production, prevention of
waste and pollution and protection of the environment. In addition to the direct
costs borne in complying with such regulations, operations and revenues may be
impacted to the extent that certain regulations increase the costs of oil and
gas production to below economic levels. Although the particular regulations
applicable in each state in which operations are conducted vary, such
regulations are generally designed to ensure that oil and gas operations are
carried out in a safe and efficient manner and to ensure that similarly-situated
operators are provided with reasonable opportunities to produce their respective
fair shares of available crude oil and natural gas reserves. However, since
these regulations generally apply to all oil and gas producers, management of
Commonwealth believes that these regulations should not put it at a material
disadvantage to other oil and gas producers.
No Advance Tax Rulings/Formal Professional Opinions
Empire and Commonwealth have determined it is not warranted to seek advance
rulings from Canadian tax officials as to the tax deferred nature of the merger
nor have they sought formal legal opinions respecting the merger. Accordingly,
while disclosure herein is based on discussions with the companies'
professionals there can be no certainty that the tax and legal effects of the
merger described herein are accurate or complete.
No Regulatory Review
The securities of Empire to be issued pursuant to the Arrangement have not been
approved or disapproved by the Securities and Exchange Commission or securities
regulatory authorities in any Province of Canada or State of the United States
of America, nor has the Securities and Exchange Commission or the securities
regulatory authorities of any Province or State passed on the adequacy or
accuracy of this Information Circular. Any representation to the contrary is an
offence.
G) Post-Acquisition Information About Empire
Directors and Officers of Empire
The following is brief description of the current and intended management and
directors of Empire:
- 33 -
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Name and Municipality of Number of Empire
Residence Age Position Securities Owned
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Norman L. Peterson 60 CEO, Treasurer, Chairman 4,727,000
(Peterson & Sons Holding Co.) of the Board
Overland Park, Kansas
---------------------------------------------------------------------------------------------------
Bryan S. Ferguson 38 President 32,800
---------------------------------------------------------------------------------------------------
John Garrison 48 Director 52,500
---------------------------------------------------------------------------------------------------
John R. Dixon 67 Director 72,500
---------------------------------------------------------------------------------------------------
Elliott M. Kaplan 49 Director 27,500
---------------------------------------------------------------------------------------------------
John L. Hersma 53 Director 190,000
---------------------------------------------------------------------------------------------------
Lorne Torhjelm 56 Director (to be appointed
pending Merger approval) 1,018,888*
---------------------------------------------------------------------------------------------------
Sieg Deckert 65 Director (to be appointed 889,871*
Grand Cayman, B.W.I. pending Merger approval)
---------------------------------------------------------------------------------------------------
* Estimated number assuming approval and completion of Merger.
Norman L. Peterson has been Chief Executive Officer, Treasurer and Chairman of
the Board of Directors of Empire since it began active operations in April of
1999. From 1974 to 1979, he was a senior officer, director and stockholder of
the holding company that owned Platte Valley Bank and Trust Company as well as a
director and shareholder of the bank. From 1988 to 1996, he was chairman and
chief executive officer of Advanced Financial, Inc. a publicly held mortgage
lending financial institution located in Shawnee, Kansas. Since 1984, he has
also been president of Peterson and Sons Holding Company, a privately held
investment and financial consulting company.
Bryan Ferguson is President of Empire. He is a Registered Professional Geologist
who received a Bachelor of Science Degree in Geology from Emporia State
University in 1984. He has over 15 years of experience in prospect evaluation,
prospect generation, assessment and management in the oil field and engineering
consulting industry. He began his professional career as a well-site geologist
based in western Colorado in the middle 80's and for a period of approximately
10 years served as a project manager in environmental engineering for IT
Corporation, an engineering and consulting company. He left IT Corporation in
1999 to join the management of Empire. His work experience includes electric log
interpretation, cuttings interpretation, geological and geophysical data
interpretation, ranking and high-grading of prospects for formulation of
exploration strategy, basin analysis, risk assessment, ultimate potential and
economic analyses, seismic interpretation, basin modelling, stratigraphic trap
modelling, evaluation of structural relief prospects, near-surface static and
velocity problems, surface topographic interpretation, market analyses,
research, economic evaluation, AFE preparation and, industry forecast modelling.
John C. Garrison has been a director of Empire since April 1999. Mr. Garrison is
a certified public accountant with over twenty-five years of experience in
accounting, auditing and financial management. He served as corporate secretary,
- 34 -
</TABLE>
<PAGE>
director and chief accounting officer of Infinity, Inc., a publicly traded
oilfield service and oil and gas exploration and development company from April
1995 to August 1999. He is also a director of two other public traded energy
companies. He is licensed to practice public accountancy in Kansas and Missouri
and has been involved in an active practice since 1976. Mr. Garrison received a
degree in business administration and accounting from Kansas State University.
John R. Dixon has been a director of Empire since April 1999. He received a
degree from the University of Kentucky in 1958 in electrical engineering and did
graduate work there in physics. He has worked in the public utility industry and
as a consultant to private industry regarding rate analysis, service-contract
negotiations and related functions. A registered professional engineer, licensed
by boards of twenty-eight states, Mr. Dixon has over thirty years experience in
engineering design and management. He founded two successful consulting firms
and served as director on several publicly traded companies. His experience
includes public utilities energy distribution system design, microwave radio
relay communications system operations, aerospace systems, missile and facility
simulation, airborne/fixed-base communications and navigation systems, and
aviation related process and infrastructure design and support consulting. He
has extensive international experience including the countries of Libya, Saudi
Arabia, Philippines, Belize, Japan, Lebanon and Mexico. Mr. Dixon served as
President of Synergy, Inc. from 1978 to 1982 and from 1982 to 1988 he served as
CEO of HSD, Inc. Since 1988, Mr. Dixon has acted as a private consultant to
three private clients of HSD, Inc. and as a consultant to the public corporation
to whom HSD was sold.
Elliot M. Kaplan has been a director of Empire since 1999. He is a practising
attorney and an officer and director of Daniels & Kaplan, P.C., Attorneys at
Law. With offices in Kansas City, Missouri and Detroit, Michigan, Daniels &
Kaplan concentrates in commercial, insolvency, fair trade practices and
employment litigation. Mr. Kaplan received his Bachelor of Arts Degree from
Antioch University in 1978 and received both Juris Doctor and Master of Business
Administration degrees from Whittier College in 1982. Mr. Kaplan is a member of
the American Bar Association, the Missouri Bar, and the District of Columbia
Bar.
John L. Hersma has been a director of Empire since 1999. A former Chief
Operating Officer with a $500 million healthcare equipment manufacturer, Mr.
Hersma has served in various sales, marketing and management capacities in the
health care industry, retiring in July of 1996 to pursue personal business
interests and investment strategies. Mr. Hersma graduated in 1968 with a degree
in Business Administration and Marketing from Northern Illinois University.
Messrs. Deckert and Torhjelm - Messrs. Deckert and Torhjelm have been directors
of Commonwealth since 1997.
Other Information About Empire Management
None of the above Empire management currently own any shares of Commonwealth.
None of the foregoing persons have been directors, officers or promoters of
public or reporting companies in the past five years except where noted, nor
have any been subject to any bankruptcy, securities sanction (cease and desist,
cease trade or similar orders) or penalty. None of the foregoing persons have
been indebted to Empire nor have any sold any material assets to Empire.
Compensation of Empire Executives
The only compensated member of Empire's management is Bryan Ferguson whose
compensation is under $100,000 US per annum.
- 35 -
<PAGE>
<TABLE>
<CAPTION>
No changes in compensation are anticipated as a consequence of the merger.
Principal Holders of Empire Voting Securities after Merger
(assuming conversion of Exchangeable Shares but excluding options and warrants)
Name and Municipality of Number of % of Class % of Class
Residence Securities Prior to Merger After Merger
----------------------------- ---------- --------------- -----------
Norman L. Peterson 4,727,000 32% 23.4%
(Peterson & Sons Holding Co.)
Overland Park, Kansas
Lorne Torhjelm 1,018,888 N/A 5.1%
Sieg Deckert 889,871 N/A 4.4%
Vancouver, BC
Options and Warrants to Purchase Empire Common Shares
(a) Existing Empire Options
Expiration
Name Status Number Exercise Price Date
---- ------ ------ -------------- ----
<S> <C> <C> <C> <C>
Norm Peterson Director 62,500 $0.60 March 23, 2004
John Dixon Director 75,000 $0.60 March 23, 2004
John Hersma Director 62,500 $0.60 March 23, 2004
Elliot Kaplan Director 62,500 $0.60 March 23, 2004
John Garrison Director 62,500 $0.60 March 23, 2004
Owen Enterprises LLC Former Consultant 450,000 $1.00 March 23, 2004
Allen Reeves Attorney 125,000 $1.00 August 9, 2002
Karen Taylor Consultant 50,000 $1.00 August 9, 2002
Phil Snowden Consultant 149,500 $1.00 August 9, 2002
Clark Burns Consultant 151,000 $1.00 August 9, 2002
Ted Abele Consultant 19,000 $1.00 August 9, 2002
Robert Kane Consultant 4,000 $1.00 August 9, 2002
Bryan Ferguson President 240,000 $1.00/$2.50 June 30, 2005
Other 75,000
-------------------
1,588,500
===================
- 36 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(b) Existing Empire Warrants
Name Status Number Exercise Price Expiration Date
---- ------ ------ -------------- ---------------
<S> <C> <C> <C> <C>
Torreon Holdings Inc. Investor 11,000,000 $3.00 June, 2001
(c) Replacement Options and Warrants (from Empire) US$ to Cdn$ (US1.00:1.50 Cdn.)
Status (with ExercisePrice
Name Commonwealth) Number (US$) Expiration Date
---- ------------- ------ -------- --------------
Lorne Torhjelm Director 83,333 $0.80 Nov. 30, 2004
93,906 $1.20 Jan. 18, 2005
Robert Stewart Director 8,444 $1.20 Dec. 21, 2003
100,000 $1.00 Oct. 23, 2005
Sieg Deckert Director 85,734 $1.20 Jan. 18, 2005
Doug Wolters Employee 16,666 $1.20 Dec. 21, 2003
16,666 $0.80 Nov. 30, 2004
8,333 $1.80 Apr. 17, 2005
Gordon Bradford Director 41,667 $1.20 Jan. 18, 2005
Fred Chelstad Director 33,333 $1.20 Jan. 18, 2005
----------------------
488,082
======================
Note:
The above figures do not include an anticipated additional 540,000 Empire
options to be granted to members of Commonwealth management who will become
members of Empire management after the Merger.
(d) Replacement Warrants
Status (with Exercise Price
Name Commonwealth) Number (US$) Expiration Date
---- ------------- ------ -------- ---------------
Sieg Deckert Director 50,000 $1.20 Jan., 2002
61,602 $1.20 July, 2001
Doug Wolters Employee 7,083 $1.20 Jan., 2002
Abe Reimer 41,666 $1.20 July, 2001
Others 2,083 $1.20 July, 2001
----------------------
162,434
======================
- 37 -
</TABLE>
<PAGE>
Public and Insider Ownership
Upon completion of the Merger the following is the estimated distribution of
Empire Shares (excluding options/warrants).
Number of Shares %
------------ --------
Current Empire Management 7,202,500 35.7%
Commonwealth Management joining Empire (Sieg 1,908,767 9.5%
Dechert, Lorne Torhjelm)
Public Sharesholders 11,064,557 54.8%
------------ --------
20,175,824 100.0%
============ ========
Legal Matters
Neither Empire nor Commonwealth are subject to any legal proceedings.
Commonwealth does not have any financial dealings with its counsel but Empire
has granted its counsel, Mr. Reeves, options as described above.
Share and Loan Capital Structure of Empire
All Empire Common Shares are of the same class and rank equally as to dividends,
voting powers and participation in any distribution of the assets of Empire on
winding up or dissolution. No common shares are, or can be issued, subject to
call or assessment. There are no pre-emptive or conversion rights, and no
provisions for redemption, purchase for cancellation, surrender of, sinking fund
or purchase fund respecting the common shares. Provisions as to the creation or
modification, amendment or variation of the rights of the holders of common
shares are contained in the Utah Revised Business Corporation Act. Each common
share is entitled to one vote with respect to the election of directors and
other matters on which the holders are ordinarily entitled to vote. No Empire
Shares are subject to pooling, escrow or hold period restrictions in the U.S.
Figures herein do not include approximately 150,000 Empire Shares expected to be
issued as a finder's fee in connection with the Merger.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Amount
Outstanding on
Completion of
Amount Amount Merger (on
Outstanding at Outstanding conversion of
Designation of Amount most recent December 31, Exchangeable
security Authorized Balance Sheet 2000 Shares)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common 50,000,000 12,962,067* 14,746,067 20,175,824
($.001 US par value)
--------------------------------------------------------------------------------------------------------------------
Options Unlimited 1,588,500 1,588,500 2,076,582
--------------------------------------------------------------------------------------------------------------------
Warrants 11,000,000 11,000,000 11,000,000 11,162,434
(exercisable at $3.00 US)
--------------------------------------------------------------------------------------------------------------------
* Excludes 750,000 shares reacquired by Empire and held in treasury.
- 38 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Holders of Empire Securities
To the knowledge of management of Empire, there are no directors or management
of Commonwealth who, immediately after the Merger becomes effective, will own,
directly or indirectly, or exercise control or direction over, more than 10% of
the outstanding voting common securities of Empire. Management of Empire will
own or control an aggregate of 9,111,267 shares (45.2%) of Empire after the
merger. No individual shareholder will own 10% or more of Empire after the
merger except Norm Peterson.
Summary of Empire Pro Forma Financial Information
Following is pro forma selected financial data which assumes the merger
transaction was completed as of September 30, 2000 for the balance sheet and
January 1, 1999 with respect to the statement of operations:
--------------------------------------------------------------------------------------------------------
Balance Sheet Data (Actual) 12/31/99 (Actual) 9/30/00 (Pro Forma) 9/30/00
------------------
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets 144,604 500,355 5,614,106
--------------------------------------------------------------------------------------------------------
Long-term obligations 0 0 0
-------------------------------------------------------------------------------------------------------
Total stockholders equity (274,431) 456,970 4,913,322
--------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Statement of (Actual) year (Pro Forma) (Actual) 9 (Pro Forma) 9 (Actual) (Pro Forma)
Operations Data ended December year ended months ended months ended Cumulative 9 Cumulative 9
31, 1999 12/31/99 9/30/00 9/30/00 months ended months ended
9/30/00 9/30/00
------------------ ---------------- ---------------- ---------------- --------------- ---------------- ---------------
Total 69,401 169,992 426,092 647,059 487,227 638,543
revenues
------------------ ---------------- ---------------- ---------------- --------------- ---------------- ---------------
Net loss (587,882) (991,909) (427,552) (641,992) (818,996) (1,038,533)
------------------ ---------------- ---------------- ---------------- --------------- ---------------- ---------------
Loss per (0.05) (0.05) (0.03) (0.03) (0.21) (0.17)
share
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Other Data (Actual) year ended (Pro Forma) year (Actual) 9 months (Pro Forma) 9 months
December 31, 1999 ended 12/31/99 ended 9/30/00 ended 9/30/00
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Cash dividends per 0 0 0 0
common share
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Book value per share (0.03) N/A 0.04 0.25
----------------------------------------------------------------------------------------------------------------------
- 39 -
</TABLE>
<PAGE>
More detailed pro forma financial information regarding Empire is attached
hereto in Schedule B.
Stock Exchange Listings - Empire
Upon completion of the Merger, it is anticipated that Empire will apply with the
American Stock Exchange for its shares to trade on such exchange. It should be
noted, however, that such application could be denied.
Auditors, Transfer Agent, Dividends
The auditors of Empire are Sartain Fishbein & Co., Tulsa, Oklahoma. The Transfer
Agent of Empire is Interwest Transfer Company, Salt Talk City, Utah.
Neither Empire nor Commonwealth have declared or paid any dividends to date and
Empire will not pay dividends in the foreseeable future.
Other Material Facts
There are no other material facts known to the directors of Empire respecting
the Merger or either company as of the date hereof. Incorporated by reference
are the public filings of Empire available through the internet site of the US
SEC (www.sec.gov). Also incorporated by reference are the public filings of
Commonwealth Energy Corporation available through the website www.sedar.com.
H) Fairness Opinion
The directors of Commonwealth retained Ross Glanville, P.Eng., M.B.A. through
Ross Glanville & Associates Ltd. of Burnaby, B.C., a recognized financial
consultant and evaluator to provide an opinion on the fairness of the Plan and
the Encompass Financing for Commonwealth Securityholders. In the opinion of Mr.
Glanville, the Plan and financing are fair from a financial point of view to the
Securityholders. (See Schedule H.)
- 40 -
<PAGE>
OTHER MEETING MATTERS
The Management of Empire knows of no other matters to come before the Meeting
other than those referred to in the Notice of Meeting. Should any other matters
properly come before the Meeting, the shares represented by the Proxy solicited
hereby will be voted on such matters in accordance with the best judgment of the
persons voting the proxy.
INCORPORATION BY REFERENCE OF INFORMATION
Certain information regarding Empire is incorporated herein by reference and is
available by contacting Empire directly or through the website www.sec.com. Such
information includes the following:
- Annual Report on Form 10KSB for the year ended December 31, 1999
- Quarterly Report on Form 10QSB for the 9 months ended September 30, 2000.
CERTIFICATES
The foregoing constitutes full, true and plain disclosure of all material facts
relating to the securities of Empire assuming completion of the transactions
described herein.
-------------------------------------- ------------------------------
Norman Peterson Bryan Ferguson
Chief Executive Officer President
-------------------------------------- ------------------------------
John Garrison John Hersma
Director Director
Dated January 16, 2001.
- 41 -
<PAGE>
<PAGE>
MERGER AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 12th day of December, 2000.
AMONG:
EMPIRE ENERGY CORPORATION, a corporation existing under the laws of
the State of Utah, U.S.A.
("Empire")
AND:
3828395 CANADA LTD., a company existing under the federal laws of
Canada
("Empire Exchangeco")
AND:
COMMONWEALTH ENERGY CORP., a corporation existing under the laws of
the Province of Alberta, Canada
("Commonwealth")
THIS AGREEMENT WITNESSES that in consideration of the respective covenants and
agreements herein contained, the parties hereto covenant and agree as follows:
Part 1
INTERPRETATION
Definitions
1.1 In this Agreement, unless there is something in the subject matter or
context inconsistent therewith, the following terms shall have the following
meanings respectively:
"1933 Act" means the United States Securities Act of 1933, as amended;
"ABCA" means the Alberta Business Corporations Act;
"Acquisition Proposal" means any bona fide proposal with respect to any
merger, amalgamation, arrangement, take-over bid, sale of assets (excluding
inventory sold in the ordinary course of business) representing more than
25% of the book value (on a consolidated basis) of Commonwealth's total
assets (or any lease, long-term supply agreement or other arrangement
having the same economic effect as a sale), any sale of more than 75% of
the Commonwealth Common Shares then outstanding or similar transactions
involving Commonwealth or any Material Subsidiary, or a proposal to do so,
excluding the Arrangement;
<PAGE>
"Affected Employees" has the meaning ascribed thereto in ss.4.10;
"affiliate" has the meaning ascribed thereto in the Securities Act, unless
otherwise expressly stated herein;
"Affiliate's Letter" means a letter, to be substantially in the form and
content of Schedule A hereto;
"Appropriate Regulatory Approvals" means those sanctions, rulings,
consents, orders, exemptions, permits and other approvals (including the
lapse, without objection, of a prescribed time under a statute or
regulation that states that a transaction may be implemented if a
prescribed time lapses following the giving of notice without an objection
being made) of Governmental Entities, regulatory agencies or
self-regulatory organizations, as set out in Schedule B hereto;
"Arrangement" means an arrangement under section 192 of the CBCA on the
terms and subject to the conditions set out in the Plan of Arrangement,
subject to any amendments or variations thereto made in accordance with
section 6.1 or Article 6 of the Plan of Arrangement or made at the
direction of the Court in the Final Order;
"Arrangement Resolutions" means the special resolution of the Commonwealth
Securityholders, to be substantially in the form and content of Schedule C
annexed hereto;
"Articles of Arrangement" means the articles of arrangement of Commonwealth
in respect of the Arrangement that are required by the CBCA to be sent to
the Director after the Final Order is made;
"Business Day" means any day on which commercial banks are generally open
for business in Seattle, Washington and Vancouver, British Columbia other
than a Saturday, a Sunday or a day observed as a holiday in Overland Park,
Kansas under the laws of the State of Kansas or the federal laws of the
United States of America or in Vancouver, British Columbia under the laws
of the Province of British Columbia or the federal laws of Canada;
"CBCA" means the Canada Business Corporations Act as now in effect and as
it may be amended from time to time prior to the Effective Date;
"CDNSC" means the British Columbia and Alberta Securities Commissions;
"CDNX" means the Canadian Venture Exchange Inc., being the stock exchange
where the shares of Commonwealth are listed as of the date hereof;
2
<PAGE>
"Circular" means the notice of the Commonwealth Meeting and accompanying
management information circular, including all appendices thereto, to be
sent to holders of Commonwealth Common Shares in connection with the
Commonwealth Meeting;
"Code" has the meaning ascribed thereto in ss.3.1(k)(ii);
"Commonwealth Common Shares" means the outstanding common shares in the
capital of Commonwealth;
"Commonwealth Documents" has the meaning ascribed thereto in ss.3.1(m);
"Commonwealth Meeting" means the special meeting of Commonwealth
Securityholders, including any adjournment thereof, to be called and held
in accordance with the Interim Order to consider the Arrangement;
"Commonwealth Options" means the Commonwealth Common Share purchase options
being outstanding and unexercised on the Effective Date;
"Commonwealth Securityholders" means the holders of Commonwealth Common
Shares, Commonwealth Warrants and Commonwealth Options, collectively;
"Commonwealth Stock Options" means those options to purchase Commonwealth
shares described on Schedule G hereto;
"Commonwealth Warrants" means the outstanding non-transferable warrants of
Commonwealth exercisable for Commonwealth Common Shares as described in
Schedule G hereto;
"Confidentiality Agreement" means the confidentiality provisions of the
letter of intent dated October 23, 2000 between Empire and Commonwealth;
"Continuance" means the change of legal domicile of Commonwealth from the
ABCA to the CBCA;
"Court" means the Court of Queen's Bench of Alberta;
"Depositary" means CIBC Mellon Trust Company at its offices set out in the
letter of transmittal and election form for use by holders of Commonwealth
Common Shares, in the form accompanying the Circular;
"Director" means the Director appointed pursuant to section 260 of the
CBCA;
"Dissent Rights" means the rights of dissent in respect of the Continuance
described in section 3.1 of the Plan of Arrangement;
"Dissenting Shareholder" has the meaning ascribed thereto in the Plan of
Arrangement;
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"Effective Date" means the date shown on the certificate of arrangement to
be issued by the Director under the CBCA giving effect to the Arrangement
provided that such date occurs on or prior to the Termination Date;
"Effective Time" has the meaning ascribed thereto in the Plan of
Arrangement;
"Empire Common Shares" means the shares of common stock in the capital of
Empire;
"Empire Holdings" means Empire Holdings Limited, a company existing under
the federal laws of Canada which, at the time of the consummation of the
Arrangement, will be an indirect wholly-owned subsidiary of Empire;
"Empire Options and Warrants" means those options and warrants to purchase
Empire shares set forth on Schedule H hereto;
"Empire Parties" means Empire, Empire Holdings and Empire Exchangeco;
"Environmental Laws" means all applicable Laws, including applicable common
law, relating to the protection of the environment and public health and
safety;
"Environmental Permits" has the meaning ascribed thereto in ss.3.1(j)(ii);
"ERISA" has the meaning ascribed thereto in ss.3.1(l)(i);
"Exchange Act" has the meaning ascribed thereto in ss.2.6(d);
"Exchange Ratio" has the meaning ascribed thereto in the Plan of
Arrangement;
"Exchangeable Shares" means the non-voting exchangeable shares in the
capital of Empire Exchangeco, having substantially the rights, privileges,
restrictions and conditions set out in Appendix 1 to the Plan of
Arrangement;
"Exchange Trust Agreement" means an agreement to be made between Empire,
Empire Exchangeco and the Trustee in connection with the Plan of
Arrangement substantially in the form and content of Schedule F annexed
hereto, with such changes thereto as the parties hereto, acting reasonably,
may agree;
"Final Order" means the final order of the Court approving the Arrangement
as such order may be amended by the Court at any time prior to the
Effective Date or, if appealed, then, unless such appeal is withdrawn or
denied, as affirmed;
"Form SB2" has the meaning ascribed thereto in ss.2.6(b);
"Form S-8" has the meaning ascribed thereto in ss.2.6(c);
"Governmental Entity" means any
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(a) multinational, federal, provincial, state, regional, municipal,
local or other government, governmental or public department, central
bank, court, tribunal, arbitral body, commission, board, bureau or
agency, domestic or foreign,
(b) any subdivision, agent, commission, board, or authority of any of
the foregoing, or
(c) any quasi-governmental or private body exercising any regulatory,
expropriation or taxing authority under or for the account of any of
the foregoing;
"Hazardous Substance" means any pollutant, contaminant, waste of any
nature, hazardous substance, hazardous material, toxic substance, dangerous
substance or dangerous good as defined or identified in or regulated by any
Environmental Law;
"holders" means, when used with reference to the Commonwealth
Securityholders, the holders of Commonwealth Common Shares, Commonwealth
Options and Commonwealth Warrants shown from time to time in the register
or other record maintained by or on behalf of Commonwealth in respect of
such Commonwealth securities and, when used with reference to the
Exchangeable Shares, means the holders of Exchangeable Shares shown from
time to time in the register maintained by or on behalf of Empire
Exchangeco in respect of the Exchangeable Shares;
"including" means including without limitation;
"Information" has the meaning ascribed thereto in ss.4.7(b);
"Interim Order" means the interim order of the Court, as the same may be
amended, in respect of the Arrangement, as contemplated by ss.2.3;
"Information" has the meaning ascribed thereto in ss.4.7(b);
"Laws" means all statutes, regulations, statutory rules, orders, and terms
and conditions of any grant of approval, permission, authority or license
of any court, Governmental Entity, statutory body (including the CDNX and
OTC Bulletin Board and the NASDAQ-AMEX Market) or self-regulatory
authority, and the term "applicable" with respect to such Laws and in the
context that refers to one or more Persons, means that such Laws apply to
such Person or Persons or its or their business, undertaking, property or
securities and emanate from a Governmental Entity having jurisdiction over
the Person or Persons or its or their business, undertaking, property or
securities;
"Material Adverse Change", when used in connection with Empire or
Commonwealth, means any change, effect, event or occurrence with respect to
its condition (financial or otherwise), properties, assets, liabilities,
obligations (whether absolute, accrued conditional or otherwise),
businesses, operations or results of operations or those of its
subsidiaries that is, or would reasonably be expected to be, material and
adverse to the business, operations or financial condition of such party
and its subsidiaries taken as a whole other than any change, effect, event
or occurrence
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(a) relating to the Canadian or United States' economy or securities
markets in general, or
(b) affecting the Canadian or United States oil and gas industry in
general;
"Material Adverse Effect" when used in connection with Empire or
Commonwealth, means any effect that is, or would reasonably be expected to
be, material and adverse to the business, operations or financial condition
of such party and its subsidiaries taken as a whole;
"Material Subsidiary" means each subsidiary of Commonwealth or Empire, the
total assets of which constituted more than ten percent of the consolidated
assets of Commonwealth or Empire or the total revenues of which constituted
more than ten percent of the consolidated revenues of Commonwealth or
Empire, in each case as set out in the financial statements of Commonwealth
or Empire for the period ended September 30, 2000 and including each
affiliate of Commonwealth or Empire that directly or indirectly holds an
equity interest in each such subsidiary;
"Person" includes any individual, firm, partnership, joint venture, venture
capital fund, limited liability company, unlimited liability company,
association, trust, trustee, executor, administrator, legal personal
representative, estate, group, body corporate, corporation, unincorporated
association or organization, Governmental Entity, syndicate or other
entity, whether or not having legal status;
"Plan of Arrangement" means the plan of arrangement substantially in the
form and content of Schedule D annexed hereto and any amendments or
variations thereto made in accordance with section 6.1 or Article 6 of the
Plan of Arrangement or made at the direction of the Court in the Final
Order;
"Pre-Effective Date Period" shall mean the period from and including the
date hereof to and including the Effective Time on the Effective Date;
"Publicly Disclosed" means disclosed by Commonwealth or Empire in any news
release or in a public filing or news release from January 1, 1999 to and
including the date of this Agreement;
"Redeemable Voting Shares" means the $0.0001 par value redeemable voting
shares to be created in the capital of Empire and having substantially the
rights, privileges, restrictions and conditions described in the Support
Agreement and which will be issued in pairs on a one-for-one basis with the
Exchangeable Shares;
"Replacement Option" has the meaning ascribed thereto in ss.2.4(d);
"Replacement Warrant" has the meaning ascribed thereto in ss.2.4(c);
"Representatives" has the meaning ascribed thereto in ss.4.7(a);
"SEC" means the United States Securities and Exchange Commission;
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"Securities Acts" means the Securities Act (British Columbia) and the
Securities Act (Alberta) and the rules, regulations and policies made
thereunder, as now in effect and as they may be amended from time to time
prior to the Effective Date;
"Specified Empire Event" means the occurrence of a Material Adverse Change
with respect to Empire, or a breach by a Empire Party of its obligations
hereunder, if by reason thereof, and taking into account ss.5.4,
Commonwealth would be entitled to rely on the failure of a condition set
forth in sections 5.3(a), 5.3(b) or 5.3(c) as a reason not to complete the
Arrangement;
"subsidiary" means, with respect to a specified body corporate, any body
corporate of which more than 50% of the outstanding shares ordinarily
entitled to elect a majority of the board of directors thereof (whether or
not shares of any other class or classes shall or might be entitled to vote
upon the happening of any event or contingency) are at the time owned
directly or indirectly by such specified body corporate and shall include
any body corporate, partnership, joint venture or other entity over which
it exercises direction or control or which is in a like relation to a
subsidiary;
"Superior Proposal" means any bona fide proposal by a third party directly
or indirectly, to acquire assets representing more than 25% of the book
value (on a consolidated basis) of Commonwealth's total assets or more than
25% of the outstanding Commonwealth Common Shares, whether by way of
merger, amalgamation, arrangement, take-over bid, sale of assets or
otherwise, and that in the good faith determination of the Board of
Directors of Commonwealth after consultation with financial advisors and
outside counsel
(a) is reasonably capable of being completed, taking into account all
legal, financial, regulatory and other aspects of such proposal and
the party making such proposal, and
(b) would, if consummated in accordance with its terms, result in a
transaction
(i) more favourable to the Commonwealth Securityholders than the
transaction contemplated by this Agreement, and
(ii) having a blended value per Commonwealth Common Share greater
than the per share value attributable thereto under the
transaction contemplated by this Agreement;
"Support Agreement" means an agreement to be made between Empire, Empire
Holdings and Empire Exchangeco substantially in the form and content of
Schedule E annexed hereto, with such changes thereto as the parties hereto,
acting reasonably, may agree;
"Termination Date" means February 28, 2001, or such later date as may be
mutually agreed by the parties to this Agreement;
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"Trustee" means the trustee to be chosen by Empire and Commonwealth, acting
reasonably, to act as trustee under the Exchange Trust Agreement;
"Urax" and "Uraxes" have the respective meanings ascribed thereto
in ss.3.1(k)(iii);
"Urax Returns" means all returns, declarations, reports, information
returns and statements required to be filed with any taxing authority
relating to Taxes;
Interpretation Not Affected by Headings, etc.
1.2 The division of this Agreement into Parts, sections and other portions and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation hereof. Unless otherwise indicated,
all references to an "Part" or "section" followed by a number and/or a letter
refer to the specified Part or section of this Agreement. The terms "this
Agreement", "hereof", "herein" and "hereunder" and similar expressions refer to
this Agreement (including the Schedules hereto) and not to any particular Part,
section or other portion hereof and include any agreement or instrument
supplementary or ancillary hereto.
Currency
1.3 Unless otherwise specifically indicated, all sums of money referred to in
this Agreement are expressed in lawful money of the United States of America.
Number, etc.
1.4 Unless the context otherwise requires, words importing the singular shall
include the plural and vice versa and words importing any gender shall include
all genders.
Date For Any Action
1.5 In the event that any date on which any action is required to be taken
hereunder by any of the parties hereto is not a Business Day, such action shall
be required to be taken on the next succeeding day which is a Business Day.
Entire Agreement
1.6 This Agreement and the agreements and other documents herein referred to
constitute the entire agreement between the parties hereto pertaining to the
terms of the Arrangement and supersede all other prior agreements,
understandings, negotiations and discussions, whether oral or written, between
the parties hereto with respect to the terms of the Arrangement.
Schedules
1.7 The following Schedules are annexed to this Agreement and are hereby
incorporated by reference into this Agreement and form part hereof:
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Schedule A - Affiliate's Letter
Schedule B - Appropriate Regulatory Approvals
Schedule C - Arrangement Resolutions
Schedule D - Plan of Arrangement
Schedule E - Support Agreement
Schedule F - Exchange Trust Agreement
Schedule G - Commonwealth Capitalization Table
Schedule H - Empire Capitalization Table
Accounting Matters
1.8 Unless otherwise stated, all accounting terms used in this Agreement in
respect of Commonwealth shall have the meanings attributable thereto under
Canadian generally accepted accounting principles and all determinations of an
accounting nature in respect of Commonwealth required to be made shall be made
in a manner consistent with Canadian generally accepted accounting principles
and past practice. Unless otherwise stated, all accounting terms used in this
Agreement in respect of Empire shall have the meanings attributable thereto
under United States generally accepted accounting principles and all
determinations of an accounting nature required to be made in respect of Empire
shall be made in a manner consistent with United States generally accepted
accounting principles and past practice.
Knowledge
1.9 Each reference herein to the knowledge of a party means, unless otherwise
specified, the existing knowledge of such party without specific or special
inquiry.
Part 2
THE ARRANGEMENT
Implementation Steps by Commonwealth
2.1 Commonwealth covenants in favour of the Empire Parties that Commonwealth
shall:
(a) apply to the Registrar of Corporations (Alberta) for permission to
continue Commonwealth from the jurisdiction of the ABCA to the CBCA;
(b) subject to ss.2.5, as soon as reasonably practicable, apply in a manner
acceptable to the Empire Parties, acting reasonably, under section 186 of
the ABCA for the Interim Order, and thereafter proceed with and diligently
seek the Interim Order;
(c) subject to ss.2.5 convene and hold the Commonwealth Meeting for the
purpose of considering the Continuance and the Arrangement Resolutions (and
for any other proper purpose as may be set out in the notice for such
meeting);
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(d) subject to obtaining the approvals as are required by the Interim
Order, proceed with and diligently pursue the application to the Court for
the Final Order; and
(e) subject to obtaining the Final Order and the satisfaction or waiver of
the other conditions herein contained in favour of each party, send to the
Director, for endorsement and filing by the Director, the Articles of
Arrangement and such other documents as may be required in connection
therewith under the CBCA to give effect to the Arrangement.
Implementation Steps by Empire Parties
2.2 The Empire Parties covenant in favour of Commonwealth that, on or prior to
the Effective Date and subject to the satisfaction or waiver of the other
conditions herein contained in favour of each such party:
(a) Empire, Empire Holdings and Empire Exchangeco shall execute and deliver
the Support Agreement;
(b) Empire and Empire Exchangeco shall execute and deliver the Exchange
Trust Agreement; and
(c) Empire shall issue the Redeemable Voting Shares in accordance with the
Support Agreement at the Effective Time.
Interim Order
2.3 The notice of motion for the application referred to in ss.2.1(b) shall
request that the Interim Order provide:
(a) for the class of Persons to whom notice is to be provided in respect of
the Arrangement and the Commonwealth Meeting and for the manner in which
such notice is to be provided;
(b) that the requisite approval for the Arrangement Resolutions shall be 66
2/3% of the votes cast on the Arrangement Resolutions (i) by holders
present in person or by proxy of Commonwealth Common Shares and also (ii)
by 66?% of Commonwealth Securityholders present in person or by proxy at
the Commonwealth Meeting (such that for such additional vote, each holder
of Commonwealth Common Shares is entitled to one vote for each Commonwealth
Common Share held, each holder of Commonwealth Options is entitled to one
vote for each Commonwealth Common Share such holder would have received on
a valid exercise of Commonwealth Options and each holder of Commonwealth
Warrants is entitled to one vote for each Commonwealth Common Share such
holder would have received on a valid exercise of Commonwealth Warrants);
(c) that, in all other respects, the terms, restrictions and conditions of
the by-laws and articles of Commonwealth, including quorum requirements and
all other matters, shall apply in respect of the Commonwealth Meeting; and
(d) for confirmation of the Dissent Rights.
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Articles of Arrangement
2.4 The Articles of Arrangement shall, with such other matters as are necessary
to effect the Arrangement, and all as subject to the provisions of the Plan of
Arrangement, provide substantially as follows:
(a) each outstanding Commonwealth Common Share that is not held by a holder
who has exercised its Dissent Rights and is ultimately entitled to be paid
the fair value of the Commonwealth Common Shares (other than Commonwealth
Common Shares held by Empire or any affiliate thereof), will be transferred
by the holder thereof to Empire Exchangeco in exchange for that number of
fully paid and non-assessable Exchangeable Shares and Redeemable Voting
Shares, as the case may be, equal to the Exchange Ratio, and the name of
each such holder of Commonwealth Common Shares will be removed from the
register of holders of Commonwealth Common Shares and added to the register
of holders of Exchangeable Shares and Redeemable Voting Shares, as the case
may be, and Empire Exchangeco will be recorded as the registered holder of
such Commonwealth Common Shares so exchanged and will be deemed to be the
legal and beneficial owner thereof;
(b) Commonwealth Common Shares held by Dissenting Shareholders who are
ultimately entitled to be paid the fair value of the Commonwealth Common
Shares held by them shall also be so transferred to Empire Exchangeco and
Commonwealth Common Shares held by Empire or any affiliate thereof will be
transferred by the holder thereof, without any act or formality on its
part, to Empire Exchangeco in exchange for that number of fully paid and
non-assessable Exchangeable Shares and Redeemable Voting Shares equal to
the Exchange Ratio, and the name of each such holder of Commonwealth Common
Shares will be removed from the register of holders of Commonwealth Common
Shares and added to the register of holders of Exchangeable Shares and
Redeemable Voting Shares and Empire Exchangeco will be recorded as the
registered holder of such Commonwealth Common Shares so exchanged and will
be deemed to be the legal and beneficial owner of such Commonwealth Common
Shares;
(c) each Commonwealth Warrant shall be transferred by the holder thereof,
without any act or formality on its part, to Empire in exchange for that
number of fully paid and non-assessable warrants ("Replacement Warrants")
proportionate to the Exchange Ratio with the exercise price appropriately
adjusted by the Exchange Ratio; and
(d) each Commonwealth Option shall be exchanged for an option (a
"Replacement Option") to purchase that number of Exchangeable Shares
proportionate to the Exchange Ratio with the exercise price appropriately
adjusted by the Exchange Ratio.
Circular
2.5 As promptly as practicable after the execution and delivery of this
Agreement, Empire and Commonwealth shall prepare the Circular together with any
other documents required by the Securities Acts or other applicable Laws in
connection with the Arrangement, and as promptly as practicable after the
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execution and delivery of this Agreement, with a target date of January 8, 2001,
Commonwealth shall cause the Circular and other documentation required in
connection with the Commonwealth Meeting to be sent to each holder of
Commonwealth Common Shares, Commonwealth Warrants and Commonwealth Options and
filed as required by the Interim Order and applicable Laws.
Securities Compliance
2.6 (a) Empire shall use all reasonable efforts to obtain any necessary orders
required from the CDNSC and other applicable Canadian securities
authorities to permit the first resale of
(i) the Exchangeable Shares and Redeemable Voting Shares issued
pursuant to the Arrangement,
(ii) the Empire Common Shares issued upon exchange of the Exchangeable
Shares (and concurrent redemption of the Redeemable Voting Shares)
from time to time, and
(iii) the Empire Common Shares issued from time to time upon the
exercise of the Replacement Options and Replacement Warrants,
in each case without qualification with or approval of or the filing of any
prospectus or similar document, or the taking of any proceeding with, or
the obtaining of any further order, ruling or consent from, any
Governmental Entity or regulatory authority under any Canadian federal,
provincial or territorial securities or other Laws or pursuant to the rules
and regulations of any regulatory authority administering such Laws, or the
fulfilment of any other legal requirement in any such jurisdiction (other
than, with respect to such first resales, any restrictions on transfer by
reason of, among other things, a holder being a "control person" of Empire
or Commonwealth for purposes of Canadian federal, provincial or territorial
securities Laws).
(b) As promptly as practicable after the date hereof, Empire shall file, if
determined to be necessary, a registration statement on Form SB2 (or other
applicable form) (the "Form SB2") in order to register under the 1933 Act
the Empire Common Shares to be issued from time to time after the Effective
Time upon exchange of the Exchangeable Shares (and redemption of the
Redeemable Voting Shares) and shall use its reasonable efforts to cause the
Form SB2 to become effective and to maintain the effectiveness of such
registration for the period that such Exchangeable Shares remain
outstanding.
(c) As promptly as practicable after the Effective Date, Empire shall file
a registration statement on Form S-8 (or other applicable form) (the "Form
S-8") in order to register under the 1933 Act those Empire Common Shares to
be issued from time to time after the Effective Time upon the exercise of
the Replacement Options and Replacement Warrants.
(d) Commonwealth and Empire shall take all such steps as may be required to
cause the transactions contemplated by Part 2 hereof and any other
dispositions of Commonwealth equity securities and/or acquisitions of
Empire equity securities (including, in each case derivative securities) in
connection with this Agreement or the transactions contemplated hereby by
any individual who is a director or officer of Commonwealth, to be exempt
under Rule 16b-3 promulgated under the United States Securities Exchange
Act of 1934, as amended (the "Exchange Act").
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Preparation of Filings
2.7 Empire and Commonwealth shall cooperate in:
(a) the preparation of any application for the orders and the preparation
of any required registration statements and any other documents reasonably
deemed by Empire or Commonwealth to be necessary to discharge their
respective obligations under United States and Canadian federal,
provincial, territorial or state securities Laws in connection with the
Arrangement and the other transactions contemplated hereby;
(b) the taking of all such action as may be required under any applicable
United States and Canadian federal, provincial, territorial or state
securities Laws (including "blue sky laws") in connection with the issuance
of the Exchangeable Shares and the Empire Common Shares in connection with
the Arrangement or the exercise of the Replacement Options and Replacement
Warrants; provided, however, that with respect to the United States "blue
sky" and Canadian provincial qualifications neither Empire nor Commonwealth
shall be required to register or qualify as a foreign corporation or to
take any action that would subject it to service of process in any
jurisdiction where such entity is not now so subject, except as to matters
and transactions arising solely from the offer and sale of the Exchangeable
Shares and the Redeemable Voting Shares and, if applicable, the listing of
Empire Common Shares on the CDNX; and
(c) the taking of all such action as may be required under the ABCA and
CBCA in connection with the transactions contemplated by this Agreement and
the Plan of Arrangement.
2.8 Each of Empire and Commonwealth shall furnish to the other all such
information concerning it and its securityholders as may be required (and, in
the case of its securityholders, available to it) for the effectuation of the
actions described in sections 2.5 and 2.6 and the foregoing provisions of this
ss.2.8, and each covenants that no information furnished by it (to its knowledge
in the case of information concerning its shareholders) in connection with such
actions or otherwise in connection with the consummation of the Arrangement and
the other transactions contemplated by this Agreement will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in any such document or necessary in order to make any information so
furnished for use in any such document not misleading in the light of the
circumstances in which it is furnished.
2.9 Empire and Commonwealth shall each promptly notify the other if at any time
before or after the Effective Time it becomes aware that the Circular or an
application for an order or a registration statement described in ss.2.6
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements contained
therein not misleading in light of the circumstances in which they are made, or
that otherwise requires an amendment or supplement to the Circular or such
application or registration statement. In any such event, Empire and
Commonwealth shall cooperate in the preparation of a supplement or amendment to
the Circular or such other document, as required and as the case may be, and, if
required, shall cause the same to be distributed to shareholders of Empire or
Commonwealth and/or filed with the relevant securities regulatory authorities.
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2.10 Commonwealth shall ensure that the Circular complies with all applicable
Laws and, without limiting the generality of the foregoing, that the Circular
does not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading in light of the circumstances in which they are
made (other than with respect to any information relating to and provided by the
Empire Parties or any third party that is not an affiliate of Commonwealth).
Without limiting the generality of the foregoing, Commonwealth shall ensure that
the Circular provides Commonwealth Securityholders with information in
sufficient detail to permit them to form a reasoned judgment concerning the
matters to be placed before them at the Commonwealth Meeting and Empire shall
provide all information regarding it necessary to do so.
2.11 Empire shall ensure that the Form SB2 and Form S-8 comply with all
applicable Laws and, without limiting the generality of the foregoing, that such
documents do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading in light of the circumstances in
which they are made (other than with respect to any information relating to and
provided by Commonwealth or any third party that is not an affiliate of Empire)
and Commonwealth shall provide all information regarding it necessary to do so.
Part 3
REPRESENTATIONS AND WARRANTIES
Representations and Warranties of Commonwealth
3.1 Commonwealth represents and warrants to and in favour of the Empire Parties
as follows and acknowledges that the Empire Parties are relying upon such
representations and warranties in connection with the matters contemplated by
this Agreement:
(a) Organization.
(i) Each of Commonwealth and the Material Subsidiaries has been duly
incorporated or formed under all applicable Laws, is validly
subsisting and has full corporate or legal power and authority to own
its properties and conduct its businesses as currently owned and
conducted. All of the outstanding shares and other ownership interests
of the Material Subsidiaries which are held directly or indirectly by
Commonwealth are validly issued, fully paid and non-assessable and all
such shares and other ownership interests are owned directly or
indirectly by Commonwealth, free and clear of all material liens,
claims or encumbrances, except as set forth in the Commonwealth
Disclosure Letter or pursuant to restrictions on transfers contained
in constating documents, and except as aforesaid there are no
outstanding options, rights, entitlements, understandings or
commitments (contingent or otherwise) regarding the right to acquire
any such shares or other ownership interests in any of the Material
Subsidiaries. Commonwealth has disclosed in the Commonwealth
Disclosure Letter the names and jurisdictions of incorporation of each
of the Material Subsidiaries.
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(ii) Neither Commonwealth nor any Material Subsidiary has any minority
interest in any other corporation or entity, which minority interest
is material in relation to the consolidated financial position of
Commonwealth.
(b) Capitalization. The authorized capital of Commonwealth consists of an
unlimited number of Commonwealth Common Shares and an unlimited number of
preferred shares, issuable in series. As of the date of this Agreement
there are 34,578,544 Common Shares issued and outstanding, nil preferred
shares issued and the number of Common Shares issuable on the exercise of
Commonwealth Options and Warrants is 5,903,116 as more particularly
described in Schedule G and including a 2 million unit private placement
which is intended to close before the Effective Date although the failure
to so close this private placement will not affect the other terms and
conditions hereof. Except as described in the preceding sentences of this
ss.3.1(b), there are no options, warrants, conversion privileges or other
rights, agreements, arrangements or commitments (pre-emptive, contingent or
otherwise) obligating Commonwealth or any Material Subsidiary to issue or
sell any shares of Commonwealth or any of the Material Subsidiaries or
securities or obligations of any kind convertible into or exchangeable for
any shares of Commonwealth, any Material Subsidiary or any other Person,
nor is there outstanding any stock appreciation rights, phantom equity or
similar rights, agreements, arrangements or commitments based upon the book
value, income or any other attribute of Commonwealth or any subsidiary.
There have been no Commonwealth Common Shares issued or purchased for
cancellation since December 31, 1998. All outstanding Commonwealth Common
Shares have been duly authorized and are validly issued and outstanding as
fully paid and non-assessable shares, free of pre-emptive rights (except
the 2 million units for which all funds have not yet been received). There
are no outstanding bonds, debentures or other evidences of indebtedness of
Commonwealth or any subsidiary having the right to vote (or that are
convertible for or exercisable into securities having the right to vote)
with the holders of the Commonwealth Common Shares on any matter. Except as
set forth in the Commonwealth Disclosure Letter, there are no outstanding
contractual obligations of Commonwealth or any of the Material Subsidiaries
to repurchase, redeem or otherwise acquire any of its outstanding
securities or with respect to the voting or disposition of any outstanding
securities of any of the Material Subsidiaries.
(c) Authority and No Violation.
(i) Commonwealth has the requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder.
The execution and delivery of this Agreement by Commonwealth and the
consummation by Commonwealth of the transactions contemplated by this
Agreement have been duly authorized by its Board of Directors and no
other corporate proceedings on its part are necessary to authorize
this Agreement, or the transactions contemplated hereby other than:
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(A) with respect to the Circular and other matters relating
solely thereto, including the implementation of the Arrangement,
the approval of the Board of Directors of Commonwealth; and
(B) with respect to the completion of the Arrangement, the
approval of the Commonwealth Securityholders.
(ii) This Agreement has been duly executed and delivered by
Commonwealth and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms, subject to
bankruptcy, insolvency and other applicable Laws affecting creditors'
rights generally, and to general principles of equity and to the fact
that the Currency Act (Canada) precludes a court in Canada from giving
judgment in' any currency other than Canadian currency.
(iii) The Board of Directors of Commonwealth has
(A) determined unanimously that the Arrangement is fair to the
holders of the Commonwealth Common Shares and is in the best
interests of Commonwealth,
(B) has requested an opinion from Ross Glanville & Associates
Ltd. to the effect that, as of the date of this Agreement, the
Exchange Ratio or the Arrangement is fair from a financial point
of view to the holders of the Commonwealth Common Shares, and
(C) determined unanimously to recommend that the holders of the
Commonwealth Common Shares vote in favour of the Arrangement.
Commonwealth is not subject to a shareholder rights plan or
"poison pill" or similar plan.
(iv) The approval of this Agreement, the execution and delivery by
Commonwealth of this Agreement and the performance by it of its
obligations hereunder and the completion of the Arrangement and the
transactions contemplated thereby, will not, except as disclosed in
the Commonwealth Disclosure Letter:
(A) result in a violation or breach of, require any consent to be
obtained under or give rise to any termination, purchase or sale
rights or payment obligation under any provision of:
(I) its or any Material Subsidiary's certificate of
incorporation, articles, by-laws or other charter documents,
including any unanimous shareholder agreement or any other
agreement or understanding relating to ownership of shares
or other interests or to corporate governance with any party
holding an ownership interest in any Material Subsidiary;
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(II) subject to obtaining the Appropriate Regulatory
Approvals relating to Commonwealth, any Laws, judgment or
decree except to the extent that the violation or breach of,
or failure to obtain any consent under, any Laws, judgment
or decree would not, individually or in the aggregate, have
a Material Adverse Effect on Commonwealth; or
(III) subject to obtaining the Appropriate Regulatory
Approvals relating to Commonwealth and except as would not,
individually or in the aggregate, have a Material Adverse
Effect on Commonwealth, any material contract, agreement,
license, franchise or permit to which Commonwealth or any
Material Subsidiary is party or by which it is bound or
subject or is the beneficiary;
(B) give rise to any right of termination or acceleration of
indebtedness of Commonwealth or any subsidiary, or cause any such
indebtedness to come due before its stated maturity or cause any
available credit of Commonwealth or any subsidiary to cease to be
available other than as would not, individually or in the
aggregate, have a Material Adverse Effect on Commonwealth;
(C) except as would not, individually or in the aggregate, have a
Material Adverse Effect on Commonwealth, result in the imposition
of any encumbrance, charge or lien upon any of its assets or the
assets of any Material Subsidiary, or restrict, hinder, impair or
limit the ability of Commonwealth or any Material Subsidiary to
carry on the business of Commonwealth or any Material Subsidiary
as and where it is now being carried on; or
(D) result in any payment (including severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due
to any director or employee of Commonwealth or any subsidiary or
increase any benefits otherwise payable under any Commonwealth
Plan or result in the acceleration of time of payment or vesting
of any such benefits, including the time of exercise of stock
options.
No consent, approval, order or authorization of, or declaration or filing
with, any Governmental Entity is required to be obtained by Commonwealth
and its subsidiaries in connection with the execution and delivery of this
Agreement or the consummation by Commonwealth of the transactions
contemplated hereby other than (A) any approvals required by the Interim
Order, (B) the Final Order, (C) filings with the Director under the CBCA,
(D) the Appropriate Regulatory Approvals relating to Commonwealth and (E)
any other consents, approvals, orders, authorizations, declarations or
filings of or with a Governmental Entity which, if not obtained, would not,
individually or in the aggregate, have a Material Adverse Effect on
Commonwealth.
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(d) No Defaults. Subject to obtaining the Appropriate Regulatory Approvals
relating to Commonwealth and except as disclosed in the Commonwealth
Disclosure Letter, neither Commonwealth nor any of its subsidiaries is in
default under, and there exists no event, condition or occurrence which,
after notice or lapse of time or both, would constitute such a default
under, any contract, agreement, license or franchise to which it is a party
which would, if terminated due to such default, cause a Material Adverse
Effect.
(e) Absence of Certain Changes or Events. Except as disclosed in the
Commonwealth Disclosure Letter or Publicly Disclosed by Commonwealth, from
December 31, 1998 through to the date hereof each of Commonwealth and the
Material Subsidiaries has conducted its business only in the ordinary and
regular course of business consistent with past practice and there has not
occurred:
(i) a Material Adverse Change with respect to Commonwealth;
(ii) any damage, destruction or loss, whether covered by insurance or
not, that could reasonably be expected to have a Material Adverse
Effect on Commonwealth;
(iii) any redemption, repurchase or other acquisition of Commonwealth
Common Shares or Commonwealth Preferred Shares by Commonwealth or any
declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to
Commonwealth Common Shares;
(iv) any material increase in or modification of the compensation
payable or to become payable by it to any of its directors or
officers, or any grant to any such director or officer of any increase
in severance or termination pay;
(v) any increase in or modification of any bonus, pension, insurance
or benefit arrangement (including the granting of stock options,
restricted stock awards or stock appreciation rights) made to, for or
with any of its directors or officers;
(vi) any acquisition or sale of its property or assets to a Person not
dealing at arm's length;
(vii) any entering into, amendment of, relinquishment, termination or
non-renewal by it of any material contract, agreement, license,
franchise, lease transaction, commitment or other right or obligation,
other than in the ordinary and regular course of business consistent
with past practice;
(viii) any resolution to approve a split, combination or
reclassification of any of its outstanding shares;
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(ix) any change in its accounting methods, principles or practices; or
(x) any agreement or arrangement to take any action which, if taken
prior to the date hereof, would have made any representation or
warranty set forth in this Agreement materially untrue or incorrect as
of the date when made.
(f) Employment.
(i) Except as set forth in the management information circular
prepared in connection with the Commonwealth Meeting or the
Commonwealth Disclosure Letter, neither Commonwealth nor any Material
Subsidiary is a party to any written or oral policy, agreement,
obligation or understanding providing for severance or termination
payments to, or any employment agreement with, any director or
officer.
(ii) Except as set forth in the Commonwealth Disclosure Letter,
neither Commonwealth nor any Material Subsidiary is a party to any
collective bargaining agreement nor subject to any application for
certification or, to the knowledge of Commonwealth, threatened or
apparent union-organizing campaigns for employees not covered under a
collective bargaining agreement nor are there any current, pending or,
to the knowledge of Commonwealth, threatened strikes or lockouts at
Commonwealth or any Material Subsidiary that would, individually or in
the aggregate, have a Material Adverse Effect on Commonwealth.
(iii) Neither Commonwealth nor any Material Subsidiary is subject to
any claim for wrongful dismissal, constructive dismissal or any other
tort claim, actual or, to the knowledge of Commonwealth, threatened,
or any litigation, actual or, to the knowledge of Commonwealth,
threatened, relating to employment or termination of employment of
employees or independent contractors, other than those claims or such
litigation as would, individually or in the aggregate, not have a
Material Adverse Effect on Commonwealth.
(iv) Commonwealth and all Material Subsidiaries have operated in
accordance with all applicable Laws with respect to employment and
labour, including, but not limited to, employment and labour
standards, occupational health and safety, employment equity, pay
equity, workers' compensation, human rights and labour relations and
there are no current, pending or, to the knowledge of Commonwealth,
threatened proceedings before any board or tribunal with respect to
any of the above areas, other than where the failure to so operate or
such proceedings which, individually or in the aggregate, would not
have a Material Adverse Effect on Commonwealth.
(g) Financial Statements. The audited consolidated financial statements for
Commonwealth as at and for each of the 12-month periods ended December 31,
1999 and 1998 and the unaudited consolidated financial statements for the
9-month period ended September 30, 2000 have been prepared in accordance
with Canadian generally accepted accounting principles (subject, in the
case of such unaudited financial statements, to the absence of notes and to
year-end adjustments), the requirements of applicable Governmental Entities
and applicable securities Laws; such financial statements present fairly,
in all material respects, the consolidated financial position and results
of operations of Commonwealth and its subsidiaries as of the respective
dates thereof and for the respective periods covered thereby, subject, in
the case of such unaudited financial statements, to year-end adjustments.
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(h) Books and Records. The books, records and accounts of Commonwealth and
its subsidiaries, in all material respects,
(i) have been maintained in accordance with good business practices on
a basis consistent with prior years,
(ii) are stated in reasonable detail and accurately and fairly reflect
the transactions and dispositions of the assets of Commonwealth and
its subsidiaries and
(iii) accurately and fairly reflect the basis for the Commonwealth
consolidated financial statements. Commonwealth has devised and
maintains a system of internal accounting controls sufficient to
provide reasonable assurances that
(A) transactions are executed in accordance with management's
general or specific authorization; and
(B) transactions are recorded as necessary
(I) to permit preparation of financial statements in
conformity with Canadian generally accepted accounting
principles or any other criteria applicable to such
statements and
(II) to maintain accountability for assets.
(i) Litigation, Etc. Except as set forth in the Commonwealth Disclosure
Letter or Publicly Disclosed by Commonwealth, there is no claim, action,
proceeding or investigation (including any native land claims) pending or,
to the knowledge of Commonwealth, threatened against Commonwealth or any
Material Subsidiary before any court or Governmental Entity that, if
adversely determined, would reasonably be expected to have a Material
Adverse Effect on Commonwealth, or prevent or materially delay consummation
of the transactions contemplated by this Agreement or the Arrangement.
Neither Commonwealth nor any Material Subsidiary, nor their respective
assets and properties, is subject to any outstanding judgment, order, writ,
injunction or decree that has had or is reasonably likely to have a
Material Adverse Effect on Commonwealth or that would prevent or materially
delay consummation of the transactions contemplated by this Agreement or
the Arrangement.
(j) Environmental. Except for any matters that, individually or in the
aggregate, would not have a Material Adverse Effect on Commonwealth:
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(i) all operations of Commonwealth and its Material Subsidiaries have
been conducted, and are now, in compliance with all Environmental
Laws;
(ii) Commonwealth and its Material Subsidiaries are in possession of,
and in compliance with, all permits, authorizations, certificates,
registrations, approvals and consents necessary under Environmental
Laws to own, lease and operate their properties and to conduct their
respective businesses as they are now being conducted or as proposed
to be conducted (collectively the "Environmental Permits"); and
(iii) except as set forth in the Commonwealth Disclosure Letter,
neither Commonwealth nor any Material Subsidiary is aware of, or is
subject to:
(A) any Environmental Laws which requires or may require any
work, repairs, construction, change in business practices or
operations, or expenditures, including capital expenditures for
facility upgrades, environmental investigation and remediation
expenditures, or any other such expenditures;
(B) any written demand or written notice with respect to the
breach of or liability under any Environmental Laws applicable to
Commonwealth or any subsidiary, including any regulations
respecting the use, storage, treatment, transportation or
disposition (including disposal or arranging for disposal) of
Hazardous Substances;
(C) any written demand or written notice with respect to
liability, by contract or operation of applicable Laws, under
Environmental Laws applicable to Commonwealth or any current or
former subsidiary or any of their respective predecessor
entities, divisions or any formerly owned, leased or operated
properties or assets of the foregoing, including liability with
respect to the presence, release or discharge of Hazardous
Substances; or
(D) any changes in the terms or conditions of any Environmental
Permits or any renewal, modification, revocation, re-issuance,
alteration, transfer or amendment of such Environmental Permits,
or any review by, or approval of, any Governmental Entity of such
Environmental Permits that are required in connection with the
execution or delivery of this Agreement, the consummation of the
transactions contemplated hereby or the continuation of business
of Commonwealth or any subsidiaries following such consummation.
(k) Tax Matters. Except as set forth in the Commonwealth Disclosure Letter:
(i) Commonwealth and each of its subsidiaries have filed, or caused to
be filed, all material Tax Returns required to be filed by them (all
of which returns were correct and complete in all material respects)
and have paid, or caused to be paid, all material amounts of Taxes
shown to be due and payable thereon, and Commonwealth's most recently
published financial statements contain an adequate provision in
accordance with generally accepted accounting principles for all
material amounts of Taxes payable in respect of each period covered by
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such financial statements and all prior periods to the extent such
Taxes have not been paid, whether or not due and whether or not shown
as being due on any Tax Returns. Commonwealth and each of its
subsidiaries have made adequate provision in accordance with generally
accepted accounting principles in their books and records for any
material amounts of Taxes accruing in respect of any accounting period
which has ended subsequent to the period covered by such financial
statements.
(ii) Neither Commonwealth nor any subsidiary has received any written
notification that any issues involving a material amount of Taxes have
been raised (and are currently pending) by Revenue Canada, the United
States Internal Revenue Service or any other taxing authority,
including, without limitation, any sales tax authority, in connection
with any of the Tax Returns referred to above and no waivers of
statutes of limitations have been given or requested with respect to
Commonwealth or any Material Subsidiary. To the best of the knowledge
of Commonwealth, there are no proposed in writing (but unassessed)
additional Taxes involving a material amount of Taxes and none has
been asserted in writing. No Tax liens have been filed for material
amounts of Taxes other than for Taxes not yet due and payable. Neither
Commonwealth nor any of its subsidiaries (i) has made an election to
be treated as a "consenting corporation" under Section 341(f) of the
United States Internal Revenue Code (the "Code") or (ii) is a party to
any Tax sharing or other similar agreement or arrangement of any
nature with any other person (other than Commonwealth or any of its
subsidiaries) pursuant to which Commonwealth or any of its
subsidiaries has or could have any material liabilities in respect of
Taxes, other than any liability arising under an agreement providing
for the sale or other disposition of property by Commonwealth or any
of its subsidiaries. Commonwealth has not made an election under
Section 897(i) of the Code to be treated as a domestic corporation for
purposes of Sections 897, 1445 and 6039C of the Code.
(iii) "Urax" and "Taxes" means, with respect to any entity, all income
taxes (including any tax on or based upon net income, gross income,
income as specially defined, earnings, profits or selected items of
income, earnings or profits) and all capital taxes, gross receipts
taxes, environmental taxes, sales taxes, use taxes, ad valorem taxes,
value added taxes, transfer taxes, franchise taxes, license taxes,
withholding taxes, payroll taxes, employment taxes, Canada Pension
Plan premiums, excise, severance, social security premiums, workers'
compensation premiums, unemployment insurance or compensation
premiums, stamp taxes, occupation taxes, premium taxes, property
taxes, windfall profits taxes, alternative or add-on minimum taxes,
goods and services tax, customs duties or other taxes, fees, imports,
assessments or charges of any kind whatsoever, together with any
interest and any penalties or additional amounts imposed by any taxing
authority (domestic or foreign) on such entity, and any interest,
penalties, additional taxes and additions to tax imposed with respect
to the foregoing. For purposes of this ss.3.1(k), the term "material
amount of Taxes" shall mean an amount of Taxes that is material to
Commonwealth and its subsidiaries taken as a whole.
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(l) Pension and Employee Benefits. Commonwealth has confirmed in the
Disclosure Letter that it has no employee benefit, health, welfare,
supplemental unemployment benefit, bonus, pension, profit sharing, deferred
compensation, stock compensation, stock purchase, retirement,
hospitalization insurance, medical, dental, legal, disability and similar
plans or arrangements or practices, whether written or oral, which are
maintained by Commonwealth and/or a Material Subsidiary (collectively
referred to as the "Commonwealth Plans").
(m) Reports. Commonwealth has filed with the CDNSC true and complete copies
of all forms, reports, schedules, statements and other documents required
to be filed by it since December 31, 1998 (such forms, reports, schedules,
statements and other documents, including any financial statements or other
documents, including any schedules included therein, are referred to as the
"Commonwealth Documents"). The Commonwealth Documents at the time filed (i)
did not contain any misrepresentation (as defined in the Securities Acts)
and (ii) complied in all material respects with the requirements of
applicable securities Laws. Commonwealth has not filed any confidential
material change report with the CDNSC or any other securities authority or
regulator or any stock exchange or other self-regulatory authority which at
the date hereof remains confidential.
(n) Compliance with Laws. Except as disclosed in the Commonwealth
Disclosure Letter or Publicly Disclosed by Commonwealth, Commonwealth and
the Material Subsidiaries have complied with and are not in violation of
any applicable Laws, orders, judgments and decrees other than
non-compliance or violations which would not, individually or in the
aggregate, have a Material Adverse Effect on Commonwealth. Without limiting
the generality of the foregoing, all securities of Commonwealth (including,
all options, rights or other convertible or exchangeable securities) have
been issued in compliance, in all material respects, with all applicable
securities Laws and all securities to be issued upon exercise of any such
options, rights and other convertible or exchangeable securities will be
issued in compliance with all applicable securities Laws.
(o) Restrictions on Business Activities. Except as set forth in the
Commonwealth Disclosure Letter or Publicly Disclosed by Commonwealth, there
is no agreement, judgment, injunction, order or decree binding upon
Commonwealth or any Material Subsidiary that has or could reasonably be
expected to have the effect of prohibiting, restricting or materially
impairing any business practice of Commonwealth or any Material Subsidiary,
any acquisition of property by Commonwealth or any Material Subsidiary or
the conduct of business by Commonwealth or any Material Subsidiary as
currently conducted other than such agreements, judgments, injunctions,
orders or decrees which would not, individually or in the aggregate, have a
Material Adverse Effect on Commonwealth.
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(p) Material Customers. There is no single customer of Commonwealth or its
subsidiaries, the loss of which would have a Material Adverse Effect on
Commonwealth.
(q) Intellectual Property. Except as set forth in the Commonwealth
Disclosure Letter, Commonwealth and its subsidiaries own, or are validly
licensed or otherwise have the right to use, all patents, patent rights,
trade-marks, trade names, service marks, copyrights, know how and other
proprietary intellectual property rights that are material to the conduct
of the business, as presently conducted, of Commonwealth and its
subsidiaries taken as a whole.
(r) Insurance. Commonwealth has policies of insurance in force as of the
date hereof naming Commonwealth as an insured which, having regard to the
nature of such risk and the relative cost of obtaining insurance,
Commonwealth believes are reasonable.
(s) Property. Except as disclosed in the Commonwealth Disclosure Letter,
Commonwealth and each Material Subsidiary have good and sufficient title to
the real property interests including leases, easements, rights of way,
permits or licences from land owners or authorities permitting the use of
land by Commonwealth or such Material Subsidiary, necessary to permit the
operation of its businesses as presently owned and conducted except for
such failure of title that would individually or in the aggregate not have
a Material Adverse Effect on Commonwealth.
(t) Licences, Etc. Except as disclosed in the Commonwealth Disclosure
Letter, Commonwealth and each Material Subsidiary owns, possesses, or has
obtained and is in compliance with, all licences, permits, certificates,
orders, grants and other authorizations of or from any Governmental Entity
necessary to conduct its businesses as now conducted or as proposed to be
conducted except for such failure that would individually or in the
aggregate not have a Material Adverse Effect on Commonwealth.
(u) Registration Rights. No holder of securities issued by Commonwealth has
any right to compel Commonwealth to register or otherwise qualify such
securities for public sale in Canada or the United States.
Representations and Warranties of the Empire Parties
3.2 The Empire Parties jointly and severally represent and warrant to and in
favour of Commonwealth as follows and acknowledge that Commonwealth is relying
upon such representations and warranties in connection with the matters
contemplated by this Agreement:
(a) Organization. Each of the Empire Parties and the Empire Material
Subsidiaries has been duly incorporated or formed under all applicable
Laws, is validly subsisting and has full corporate or legal power and
authority to own its properties and conduct its businesses as currently
owned and conducted. All of the outstanding shares of capital stock and
other ownership interests of Empire's subsidiaries which are held directly
or indirectly by Empire are validly issued, fully paid and non-assessable
and all such shares and other ownership interests are owned directly or
indirectly by Empire, free and clear of all material liens, claims or
encumbrances except as disclosed by Empire to Commonwealth or pursuant to
restrictions on transfer contained in constating documents, and there are
no outstanding options, rights, entitlements, understandings or commitments
(pre-emptive, contingent or otherwise) regarding the right to acquire any
such shares of capital stock or other ownership interests in any of its
subsidiaries.
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(b) Capitalization. The authorized capital of Empire consists of 50 million
shares of common stock, $001 par value. As of the date hereof, there are
13,712,062 Empire Common Shares issued and outstanding and 12,761,000
Empire Common Shares reserved for issuance for 1,588,500 stock options and
11,000,000 warrants. There are no other options, warrants, conversion
privileges or other rights, agreements, arrangements or commitments
(contingent or otherwise) obligating Empire to issue or sell any shares or
securities or obligations of any kind convertible into or exchangeable for
any shares. All outstanding Empire Common Shares have been duly authorized
and are validly issued and outstanding as fully paid and non-assessable
shares, free of pre-emptive rights. There are no outstanding bonds,
debentures or other evidences of indebtedness of Empire having the right to
vote (or that are convertible for or exercisable into securities having the
right to vote) with the holders of the Empire Common Shares on any matter.
Other than under employee stock option plans, there are no outstanding
contractual obligations of Empire to repurchase, redeem or otherwise
acquire any of its outstanding securities or with respect to the voting or
disposition of any outstanding securities of any of its subsidiaries.
(c) Authority and No violation.
(i) Each of the Empire Parties has the requisite corporate power and
authority to enter into Agreement, the Support Agreement and the
Exchange Trust Agreement and to perform its obligations hereunder and
thereunder. The execution and delivery of this Agreement, the Support
Agreement and the Exchange Trust Agreement by each of the Empire
Parties and the consummation by each of the Empire Parties of the
transactions contemplated by this Agreement, the Support Agreement and
the Exchange Trust Agreement have been duly authorized by its
respective Board of Directors and no other corporate proceedings on
its part are necessary to authorize this Agreement, the Support
Agreement and the Exchange Trust Agreement or the transactions
contemplated hereby or thereby.
(ii) This Agreement has been duly executed and delivered by each of
the Empire Parties and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms,
subject to bankruptcy, insolvency and other applicable Laws affecting
creditors' rights generally, and to general principles of equity. Each
of the Support Agreement and the Exchange Trust Agreement will be duly
executed and delivered by each of the Empire Parties party thereto
and, when so executed and delivered, will constitute its legal, valid
and binding obligation, enforceable against it in accordance with its
terms, subject to bankruptcy, insolvency and other applicable Laws
affecting creditors' rights generally, and to general principles of
equity.
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(iii) The approval of this Agreement, the Support Agreement and the
Exchange Trust Agreement, the execution and delivery by each of the
Empire Parties of this Agreement, the Support Agreement and the
Exchange Trust Agreement and the performance by it of its obligations
hereunder and thereunder and the completion of the Arrangement and the
transactions contemplated thereby, will not:
(A) result in a violation or breach of, require any consent to be
obtained under or give rise to any termination, purchase or sale
rights or payment obligation under any provision of:
(I) its or any Empire Material Subsidiary's certificate of
incorporation, articles, by-laws or other charter documents,
including any unanimous shareholder agreement or any other
agreement or understanding relating to ownership of shares
or other interests or to corporate governance with any party
holding an ownership interest in any Empire Material
Subsidiary;
(II) subject to obtaining the Appropriate Regulatory
Approvals relating to the Empire Parties, any Laws, judgment
or decree except to the extent that the violation or breach
of, or failure to obtain any consent under, any Laws,
judgment or decree would not, individually or in the
aggregate, have a Material Adverse Effect on Empire; or
(III) subject to obtaining the Appropriate Regulatory
Approvals relating to the Empire Parties and except as would
not, individually or in the aggregate, have a Material
Adverse Effect on Empire, any material contract, agreement,
license, franchise or permit to which it is party or by
which it is bound or is subject or is the beneficiary;
(B) give rise to any right of termination or acceleration of
indebtedness of any Empire Party or any Empire Material
Subsidiary, or cause such indebtedness to come due before its
stated maturity or cause any available credit of any Empire Party
or any Empire Material Subsidiary to cease to be available; or
(C) except as would not, individually or in the aggregate, have a
Material Adverse Effect on Empire, result in the imposition of
any encumbrance, charge or lien upon any of its assets, or
restrict, hinder, impair or limit its ability to carry on its
business as and where it is now being carried on.
No consent, approval, order or authorization of, or declaration or filing
with, any Governmental Entity is required to be obtained by any of the
Empire Parties or the Empire Material Subsidiaries in connection with the
execution and delivery of this Agreement, the Support Agreement and the
Exchange Trust Agreement or the consummation by any of the Empire Parties
of the transactions contemplated hereby or thereby other than (A) the
Appropriate Regulatory Approvals relating to the Empire Parties, (B) any
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filings required in connection with the creation and issue of the
Redeemable Voting Share, (C) any approval required in connection with the
amendment of the articles of Empire Exchangeco to create the Exchangeable
Shares and (D) any other consents, approvals, orders, authorizations,
declarations or filings of or with a Governmental Entity which, if not
obtained, would not, individually or in the aggregate, have a Material
Adverse Effect on Empire.
(d) Absence of Certain Changes or Events. Except as Publicly Disclosed by
Empire, since December 31, 1998 through to the date hereof each of the
Empire Parties and each Empire Material Subsidiary has conducted its
business only in the ordinary and regular course of business consistent
with past practice and there has not occurred:
(i) a Material Adverse Change with respect to Empire;
(ii) any agreement or arrangement to take any action which, if taken
prior to the date hereof, would have made any representation or
warranty set forth in this Agreement materially untrue or incorrect as
of the date when made;
(iii) any resolution to approve a split, combination or
reclassification of the Empire Common Shares; or
(iv) any material change in its accounting methods, principles or
practices.
(e) Financial Statements. The audited consolidated financial statements for
Empire as at and for each of the 12-month periods ended on December 31,
1999 and 1998 and the unaudited consolidated financial statements for the
nine-months ended September 30, 2000 have been prepared in accordance with
United States generally accepted accounting principles, the requirements of
applicable Governmental Entities and applicable securities Laws; such
financial statements present fairly, in all material respects, the
consolidated financial position and results of operations of Empire and its
subsidiaries as of the respective dates thereof and for the respective
periods covered thereby.
(f) Reports. Empire and/or its predecessor, Medivest, Inc. has filed with
the SEC true and complete copies of all forms, reports, schedules,
statements and other documents required to be filed by it since January 1,
1997, and such documents, at the time filed; (i) did not contain any
misrepresentation (as defined in the 1933 Act) and (ii) complied in all
material respects with the requirements of applicable securities Laws.
Empire has not filed any confidential material change report with the SEC
or any other securities authority or regulator or any stock exchange or
other self-regulatory authority which at the date hereof remains
confidential.
(g) Exchangeable Shares and Redeemable Voting Shares. The Exchangeable
Shares and Redeemable Voting Shares to be issued in connection with the
Arrangement will be duly and validly issued by Empire Exchangeco and
Empire, respectively, on the Effective Date as fully paid and
non-assessable shares.
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(h) Empire Common Shares. The Empire Common Shares to be issued pursuant to
the Arrangement or upon the exchange from time to time of the Exchangeable
Shares or upon the exercise from time to time of the Replacement Options
will, in all cases, be duly and validly issued by Empire on their
respective dates of issue as fully paid and non-assessable shares.
(i) Compliance with Laws. Except as disclosed in writing by Empire to
Commonwealth or Publicly Disclosed by Empire, Empire and the Empire
Material Subsidiaries have complied with and are not in violation of any
applicable Laws, orders, judgments and decrees other than non-compliance or
violations which would not, individually or in the aggregate, have a
Material Adverse Effect on Empire. Without limiting the generality of the
foregoing, all securities of Empire (including all options, rights or other
convertible or exchangeable securities) have been issued in compliance in
all material respects with all applicable securities Laws and all
securities to be issued upon exercise of any such options, rights and other
convertible or exchangeable securities will be issued in compliance with
all applicable securities Laws.
(j) Litigation, Etc. Except as disclosed in writing by Empire to
Commonwealth or Publicly Disclosed by Empire, there is no claim, action,
proceeding or investigation (including any native land claims) pending or,
to the knowledge of Empire, threatened against Empire or any Empire
Material Subsidiary before any court or Governmental Entity that, if
adversely determined, would reasonably be expected to have a Material
Adverse Effect on Empire, or prevent or materially delay consummation of
the transactions contemplated by this Agreement or the Arrangement. Neither
Empire nor any Empire Material Subsidiary, nor their respective assets and
properties, is subject to any outstanding judgment, order, writ, injunction
or decree that has had or is reasonably likely to have a Material Adverse
Effect on Empire or that would prevent or materially delay consummation of
the transactions contemplated by this Agreement or the Arrangement.
(k) Tax Matters. Except as disclosed in writing by Empire to Commonwealth
or Publicly Disclosed by Empire:
(i) Empire and each of its subsidiaries have timely filed, or caused
to be filed, all material Tax Returns required to be filed by them
(all of which returns were correct and complete in all material
respects) and have paid, or caused to be paid, all material amounts of
Taxes shown to be due and payable thereon, and Empire's most recently
published financial statements contain an adequate provision in
accordance with generally accepted accounting principles for all
material amounts of Taxes payable in respect of each period covered by
such financial statements and all prior periods to the extent such
Taxes have not been paid, whether or not due and whether or not shown
as being due on any Tax Returns. Empire and each of its subsidiaries
have made adequate provision in accordance with generally accepted
accounting principles in their respective books and records for any
Taxes accruing in respect of any accounting period which has ended
subsequent to the period covered by such financial statements; and
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(ii) neither Empire nor any subsidiary has received any written
notification that any issues involving a material amount of Taxes have
been raised (and are currently pending) by Revenue Canada, the United
States Internal Revenue Service or any other taxing authority,
including, without limitation, any sales tax authority, in connection
with any of the Tax Returns referred to above and no waivers of
statutes of limitations have been given or requested with respect to
Empire or any subsidiary. To the best of the knowledge of Empire,
there are no proposed (but unassessed) additional Taxes involving a
material amount of Taxes and none has been asserted in writing. No Tax
liens have been filed other than for Taxes not yet due and payable.
Neither Empire nor any of its subsidiaries (i) has made an election to
be treated as a "consenting corporation" under Section 341(f) of the
Code or (ii) is a party to any Tax sharing or other similar agreement
or arrangement of any nature with any other person (other than
Commonwealth or any of its subsidiaries) pursuant to which Empire or
any of its subsidiaries has or could have any material liabilities in
respect of Taxes. Empire has not made an election under Section 897(i)
of the Code to be treated as a domestic corporation for purposes of
Sections 897, 1445 and 6039C of the Code.
(l) Environmental. Except for matters that, individually or in the
aggregate, would not have a Material Adverse Effect on Empire:
(i) all operations of Empire and the Empire Material Subsidiary have
been conducted, and are now, in compliance with all Environmental
Laws; and
(ii) Empire and the Empire Material Subsidiaries are in possession of,
and in compliance with, all permits, authorizations, certificates,
registrations, approvals and consents necessary under Environmental
Laws to own, lease and operate their properties and conduct their
respective businesses as they are now being conducted or as proposed
to be conducted.
Survival
3.3 For greater certainty, the representations and warranties of Commonwealth
and each Empire Party contained herein shall survive the execution and delivery
of this Agreement and shall terminate on the earlier of the termination of this
Agreement in accordance with its terms and the Effective Time. Any investigation
by a party hereto and its advisors shall not mitigate, diminish or affect the
representations and warranties of another party to this Agreement.
Part 4
COVENANTS
Retention of Goodwill
4.1 During the Pre-Effective Date Period, Commonwealth will, subject to the fact
that a transaction involving its businesses is contemplated hereby, continue to
carry on the business of Commonwealth and its subsidiaries in a manner
consistent with prior practice, working to preserve the attendant goodwill of
such entities and to contribute to retention of that goodwill to and after the
Effective Date, but subject to the following provisions of this Part 4. The
following provisions of this Part 4 are intended to be in furtherance of this
general commitment.
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Material Commitments
4.2 Subject to applicable Law and the other provisions of this Agreement, during
the Pre-Effective Date Period, Commonwealth and its subsidiaries will consult on
an ongoing basis with senior officers of Empire in order to provide for an
orderly integration of operations.
Covenants of Commonwealth
4.3 (a) Commonwealth covenants and agrees that, until the Effective Date or the
earlier termination of this Agreement in. accordance with Part 6, except
(i) with the consent of Empire on behalf of the Empire Parties to any
deviation therefrom, which shall not be unreasonably withheld; (ii) with
respect to any matters which were disclosed in the Commonwealth Disclosure
Letter; or (iii) with respect to any matter contemplated by this Agreement
or the Plan of Arrangement, including the transactions involving the
businesses of Commonwealth and Empire contemplated hereby, Commonwealth
will, and will cause its subsidiaries to:
(i) carry on its business in, and only in, the ordinary and regular
course in substantially the same manner as heretofore conducted and,
to the extent consistent with such business, use all reasonable
efforts to preserve intact its present business organization and keep
available the services of its present officers and employees and
others having business dealings with it to the end that its goodwill
and business shall be maintained;
(ii) not commence to undertake a substantial expansion of its business
facilities or an expansion that is out of the ordinary and regular
course of business consistent with prior practice in light of current
market and economic conditions;
(iii) not split, combine or reclassify any of the outstanding shares
of Commonwealth nor declare, set aside or pay any dividends on or make
any other distributions on or in respect of the outstanding shares of
Commonwealth;
(iv) not amend the articles or by-laws of Commonwealth or materially
amend the articles or by-laws of any subsidiary;
(v) not sell, pledge, encumber, allot, reserve, set aside or issue,
authorize or propose the sale, pledge, encumbrance, allotment,
reservation, setting aside or issuance of, or purchase or redeem or
propose the purchase or redemption of, any shares in its capital stock
or of any subsidiary thereof or any class of securities convertible or
exchangeable into, or rights, warrants or options to acquire, any such
shares or other convertible or exchangeable securities, except for (a)
transactions between two or more wholly-owned Commonwealth
subsidiaries or between a wholly-owned subsidiary of Commonwealth and
Commonwealth, (b) the issuance of Commonwealth Common Shares pursuant
to fully vested Commonwealth Options granted prior to the date hereof,
(c) the issuance of Commonwealth Common Shares pursuant to the
exercise of Commonwealth Warrants;
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(vi) not, whether through its Board of Directors or otherwise,
accelerate the vesting of any unvested Commonwealth Options or
accelerate the release of, or the expiry date of any hold period
relating to, any Commonwealth Common Shares held in the Commonwealth
Stock Option Plan;
(vii) not reorganize, amalgamate or merge Commonwealth or any of its
subsidiaries with any other Person, nor acquire or agree to acquire by
amalgamating, merging or consolidating with, purchasing substantially
all of the assets of or otherwise, any business of any corporation,
partnership, association or other business organization or division
thereof, which acquisition would be material to its business or
financial condition on a consolidated basis (other than relating to
transactions between two or more wholly-owned Commonwealth
subsidiaries or between a wholly-owned subsidiary of Commonwealth and
Commonwealth);
(viii) except with respect to the sale of assets of Commonwealth or
any subsidiary in the ordinary and regular course of business
consistent with past practice, not sell, pledge, encumber, lease or
otherwise dispose of any material assets (other than relating to
transactions between two or more wholly-owned Commonwealth
subsidiaries or between a wholly-owned subsidiary of Commonwealth and
Commonwealth);
(ix) not guarantee the payment of material indebtedness or incur
material indebtedness for money borrowed or issue or sell any debt
securities except in the ordinary and regular course of business
consistent with past practice;
(x) carry out the terms of the Interim Order and the Final Order
applicable to it and use its reasonable efforts to comply promptly
with all requirements which applicable Laws may impose on Commonwealth
or its subsidiaries with respect to the transactions contemplated
hereby and by the Arrangement;
(xi) not, and cause each of its subsidiaries not:
(A) other than in the usual, ordinary and regular course of
business and consistent with past practice or pursuant to
existing employment, pension, supplemental pension, termination,
compensation arrangements or policies, enter into or materially
modify any employment, severance, collective bargaining or
similar agreements, policies or arrangements with, or grant any
material bonuses, salary increases, stock options, pension or
supplemental pension benefits, profit sharing, retirement
allowances, deferred compensation, incentive compensation,
severance or termination pay to, or make any loan to, any
officers or directors of it; or
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(B) other than in the usual, ordinary and regular course of
business and consistent with past practice or pursuant to
existing employment, pension, supplemental pension, termination,
compensation arrangements or policies, in the case of employees
who are not officers or directors, take any action with respect
to the entering into or modifying of any material employment,
severance, collective bargaining or similar agreements, policies
or arrangements or with respect to the grant of any material
bonuses, salary increases, stock options, pension or supplemental
pension benefits, profit sharing, retirement allowances, deferred
compensation, incentive compensation, severance or termination
pay or any other form of compensation or profit sharing or with
respect to any increase of benefits payable;
(xii) not, except in the usual, ordinary and regular course of
business and consistent with past practice: (A) satisfy or settle any
claims or liabilities prior to the same being due, except such as have
been reserved against in the financial statements of Commonwealth and
its subsidiaries or disclosed in the Commonwealth Disclosure Letter,
which are, individually or in the aggregate, material; (B) grant any
waiver, exercise any option or relinquish any contractual rights which
are, individually or in the aggregate, material; or (C) enter into any
interest rate, currency or commodity swaps, hedges or other similar
financial instruments;
(xiii) use its reasonable commercial efforts (or cause each of its
subsidiaries to use reasonable commercial efforts) to cause its
current insurance (or re-insurance) policies not to be cancelled or
terminated or any of the coverage thereunder to lapse, unless
simultaneously with such termination, cancellation or lapse,
replacement policies underwritten by insurance and re-insurance
companies of nationally recognized standing providing coverage equal
to or greater than the coverage under the cancelled, terminated or
lapsed policies for substantially similar premiums are in full force
and effect;
(xiv) not, and will cause its subsidiaries not to, settle or
compromise any claim brought by any present, former or purported
holder of any of its securities in connection with the transactions
contemplated by this Agreement or the Arrangement prior to the
Effective Date;
(xv) except in the usual, ordinary and regular course of business and
consistent with past practice or as required by applicable Laws, not,
and will cause its subsidiaries not to, enter into or modify in any
material respect any contract, agreement, commitment or arrangement
which new contract or series of related new contracts or modification
to an existing contract or series of related existing contracts would
have a Material Adverse Effect on Commonwealth;
(xvi) incur or commit to capital expenditures prior to the Effective
Date only in the ordinary course consistent with past practice and
not, in any event, exceeding $500,000, individually or in the
aggregate;
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(xvii) not make any changes to existing accounting practices relating
to Commonwealth or any subsidiary except as required by Law or
required by generally accepted accounting principles or make any
material tax election inconsistent with past practice; and
(xviii) promptly advise Empire orally and, if then requested, in
writing:
(A) of any event occurring subsequent to the date of this
Agreement that would render any representation or warranty of
Commonwealth contained in this Agreement (except any such
representation or warranty which speaks as of a date prior to the
occurrence of such event), if made on or as of the date of such
event or the Effective Date, untrue or inaccurate in any material
respect;
(B) of any Material Adverse Change in respect of Commonwealth;
and
(C) of any material breach by Commonwealth of any covenant or
agreement contained in this Agreement; and
(b) Commonwealth shall and shall cause its subsidiaries to perform all
obligations required or desirable to be performed by Commonwealth or any of
its subsidiaries under this Agreement, co-operate with Empire in connection
therewith, and do all such other acts and things as may be necessary or
desirable in order to consummate and make effective, as soon as reasonably
practicable, the transactions contemplated in this Agreement and, without
limiting the generality of the foregoing, Commonwealth shall and where
appropriate shall cause its subsidiaries to:
(i) use all reasonable efforts to obtain the approvals of holders of
Commonwealth Common Shares to the Arrangement, subject, however, to
the exercise by the Board of Directors of Commonwealth of its
fiduciary duties as provided herein;
(ii) apply for and use all reasonable efforts to obtain all
Appropriate Regulatory Approvals relating to Commonwealth or any of
its subsidiaries and, in doing so, to keep Empire reasonably informed
as to the status of the proceedings related to obtaining the
Appropriate Regulatory Approvals, including, but not limited to,
providing Empire with copies of all related applications and
notifications, in draft form, in order for Empire to provide its
reasonable comments;
(iii) apply for and use all reasonable efforts to obtain the Interim
Order and the Final Order;
(iv) defend all lawsuits or other legal, regulatory or other
proceedings challenging or affecting this Agreement or the
consummation of the transactions contemplated hereby;
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(v) use its reasonable efforts to have lifted or rescinded any
injunction or restraining order or other order which may adversely
affect the ability of the parties to consummate the transactions
contemplated hereby;
(vi) effect all necessary registrations, filings and submissions of
information required by Governmental Entities from Commonwealth or any
of its subsidiaries;
(vii) use its reasonable efforts to obtain all necessary waivers,
consents and approvals required to be obtained by Commonwealth or a
subsidiary from other parties to loan agreements, leases or other
contracts; and
(viii) use its reasonable efforts to ensure that Commonwealth's
affiliates (for the purposes of Rule 145 under the 1933 Act) execute
and deliver to Empire, on or prior to the Effective Date, an
Affiliate's Letter.
Covenants of the Empire Parties
4.4 Each of the Empire Parties hereby jointly and severally covenants and agrees
(and, if applicable, will cause its subsidiaries):
(a) to perform all obligations required or desirable to be performed by it
under this Agreement, to co-operate with Commonwealth in connection
therewith, and to do all such other acts and things as may be necessary or
desirable in order to consummate and make effective, as soon as reasonably
practicable, the transactions contemplated by this Agreement and, without
limiting the generality of the foregoing, to:
(i) apply for and use all reasonable efforts to obtain all Appropriate
Regulatory Approvals relating to the Empire Parties, and, in doing so,
to keep Commonwealth reasonably informed as to the status of the
proceedings related to obtaining the Appropriate Regulatory Approvals,
including; but not limited to, providing Commonwealth with copies of
all related applications and notifications, in draft form, in order
for Commonwealth to provide its reasonable comments;
(ii) defend all lawsuits or other legal, regulatory or other
proceedings to which it is a party challenging or affecting this
Agreement or the consummation of the transactions contemplated hereby;
(iii) use all reasonable efforts to have lifted or rescinded any
injunction or restraining order or other order relating to the Empire
Parties which may adversely affect the ability of the parties to
consummate the transactions contemplated hereby;
(iv) effect all necessary registrations, filings and submissions of
information required by Governmental Entities from the Empire Parties
or their subsidiaries;
(v) cause the articles of Empire Exchangeco and Empire to be amended
to, among other things, create the Exchangeable Shares and Redeemable
Voting Shares respectively; and
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(vi) cause Empire to reserve a sufficient number of Empire Common
Shares for issuance upon the completion of the Arrangement and the
exchange from time to time of Exchangeable Shares (including
Replacement Warrants) and the exercise from time to time of
Replacement Options and Replacement Warrants;
(b) carry out the terms of the Interim Order and Final Order applicable to
it and use its reasonable efforts to comply promptly with all requirements
which applicable Laws may impose on Empire or its subsidiaries with respect
to the transactions contemplated hereby and by the Arrangement;
(c) in connection with the consummation of the transactions contemplated
hereby and by the Arrangement, use its reasonable efforts to obtain all
necessary waivers, consents and approvals required to be obtained by Empire
or a subsidiary of Empire from other parties to leases or other contracts;
(d) at or prior to the Effective Time, Empire shall appoint two of the
current directors of Commonwealth to become directors of Empire;
(e) until the Effective Date or the earlier termination of this Agreement
in accordance with Part 6, except (i) with the consent of Commonwealth to
any deviation therefrom, which shall not be unreasonably withheld; (ii)
with respect to any matters which were disclosed by Empire to Commonwealth
in writing; or (iii) with respect to any matter contemplated by this
Agreement or the Plan of Arrangement, including the transactions involving
the businesses of Commonwealth and Empire contemplated hereby, Empire will:
(i) not split, combine or reclassify any of the outstanding shares of
Empire nor declare, set aside or pay any dividends on or make any
other distributions on or in respect of the outstanding shares of
Empire;
(ii) not make any changes to existing accounting practices related to
Empire except as required by a change in United States generally
accepted accounting practice or by applicable Law;
(iii) not reorganize, amalgamate or merge Empire with any other
Person, nor acquire by amalgamating, merging or consolidating with,
purchasing a majority of the voting securities or substantially all of
the assets of or otherwise, any business or Person which acquisition
would reasonably be expected to materially delay the transactions
contemplated hereby;
(iv) promptly advise Commonwealth orally and, if then requested, in
writing:
(A) of any event occurring subsequent to the date of this
Agreement that would render any representation or warranty of
Empire contained in this Agreement (except any such
representation or warranty which speaks as of a date prior to the
occurrence of such event), if made on or as of the date of such
event or the Effective Date, untrue or inaccurate in any material
respect;
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(B) of any Material Adverse Change in respect of Empire; and
(C) of any material breach by Empire of any covenant or agreement
contained in this Agreement;
(f) the Empire Parties shall not take any action which may jeopardise the
exchange of the Commonwealth Common Shares by holders of the Commonwealth
Common Shares resident in Canada for the purposes of the Income Tax Act
(Canada) from being treated on a tax deferred basis under the Income Tax
Act (Canada) for holders who are otherwise eligible for such treatment; and
(g) from and after the Effective Time will use their best efforts to cause
to be released from any escrow restrictions, any shares of Empire
Exchangeco which are issued in exchange for shares of Commonwealth which
are currently held in escrow by the CIBC Mellon Trust Company under an
agreement dated December 18, 1997 respecting 9,865,390 Commonwealth shares.
Notwithstanding the generality of the foregoing commitment, the Empire
Parties agree they will not oppose any application for release from escrow
made to the CDNX or any CDNSC of Commonwealth shares or Empire Exchangeco
shares or of Empire shares in the event of exchange for such escrowed
Commonwealth shares and will assist the registered holders of such escrowed
shares to make such escrow release applications and will also consent to
the escrow agreement being amended or terminated and all escrowed shares
being released to the holders thereof if acceptable to the shareholders of
Commonwealth. In the event the escrowed Commonwealth shares or Empire
Exchangeco shares issued in substitution therefor are for any reason
cancelled, Empire agrees to forthwith issue to the former holders thereof
on a one for six basis for escrowed Commonwealth shares, common shares of
Empire (as currently constituted) free of any lien, encumbrance or
restriction (except for hold periods of general application) providing the
Arrangement contemplated hereby does complete.
Covenants Regarding Non-Solicitation
4.5 (a) Subject to ss.4.6, Commonwealth shall not, directly or indirectly,
through any officer, director, employee, representative or agent of
Commonwealth or any of its subsidiaries, (i) solicit, initiate or knowingly
encourage (including by way of furnishing information or entering into any
form of agreement, arrangement or understanding) the initiation of any
inquiries or proposals regarding an Acquisition Proposal, (ii) participate
in any discussions or negotiations regarding any Acquisition Proposal,
(iii) withdraw or modify in a manner adverse to Empire the approval of the
Board of Directors of Commonwealth of the transactions contemplated hereby,
(iv) approve or recommend any Acquisition Proposal or (v) enter into any
agreement, arrangement or understanding related to any Acquisition
Proposal. Notwithstanding the preceding part of this ss.4.5(a) and any
other provision of this Agreement, nothing shall prevent the Board of
Directors of Commonwealth prior to the issuance of the Final Order from
considering, participating in any discussions or negotiations, or entering
into a confidentiality agreement and providing information pursuant to
ss.4.5(c), regarding an unsolicited bona fide written Acquisition Proposal
that did not otherwise result from a breach of this ss.4.5 and that the
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Board of Directors of Commonwealth determines in good faith, after
consultation with financial advisors and outside counsel, is reasonably
likely to result in a Superior Proposal; provided, however, that prior to
taking such action, the Board of Directors must receive advice of outside
counsel that it is appropriate that the Board of Directors of Commonwealth
take such action in order to discharge properly its fiduciary duties.
Commonwealth shall not consider, negotiate, accept, approve or recommend an
Acquisition Proposal after the date of the issuance of the Final Order.
Commonwealth shall, and shall cause the officers, directors, employees,
representatives and agents of Commonwealth and its subsidiaries to, cease
immediately all discussions and negotiations regarding any proposal that
constitutes, or may reasonably be expected to lead to, an Acquisition
Proposal.
(b) Commonwealth shall promptly notify Empire, at first orally and then in
writing, of any Acquisition Proposal and any inquiry that could lead to an
Acquisition Proposal, or any amendments to the foregoing, or any request
for non-public information relating to Commonwealth or any Material
Subsidiary in connection with an Acquisition Proposal or for access to the
properties, books or records of Commonwealth or any Material Subsidiary by
any Person that informs Commonwealth or such Material Subsidiary that it is
considering making, or has made, an Acquisition Proposal. Such notice shall
include a description of the material terms and conditions of any proposal,
the identity of the Person making such proposal, inquiry or contact and
provide such other details of the proposal, inquiry or contact as Empire
may reasonably request. Commonwealth shall (i) keep Empire fully informed
of the status including any change to the material terms of any such
Acquisition Proposal or inquiry and (ii) provide to Empire as soon as
practicable after receipt or delivery thereof with copies of all
correspondence and other written material sent or provided to Commonwealth
or any Material Subsidiary from any Person in connection with any
Acquisition Proposal sent or provided by Commonwealth to any Person in
connection with any Acquisition Proposal.
(c) If Commonwealth receives a request for material non-public information
from a Person who has made an unsolicited bona fide written Acquisition
Proposal and Commonwealth is permitted, as contemplated under the second
sentence of ss.4.5(a), to negotiate the terms of such Acquisition Proposal,
then, and only in such case, the Board of Directors of Commonwealth may,
subject to the execution by such Person of a confidentiality agreement
containing a standstill provision substantially similar to that contained
in the confidentiality agreement then in effect between Commonwealth and
Empire, provide such Person with access to information regarding
Commonwealth; provided, however, that the Person making the Acquisition
Proposal shall not be precluded under such confidentiality agreement from
making the Acquisition Proposal (but not any material amendment thereto)
and provided further that Commonwealth sends a copy of any such
confidentiality agreement to Empire promptly upon its execution and Empire
is provided with a list of or copies of the information provided to such
Person and immediately provided with access to similar information to which
such Person was provided.
(d) Commonwealth shall ensure that its officers, directors and employees
and its subsidiaries and their officers, directors and employees and any
financial advisors or other advisors or representatives retained by it are
aware of the provisions of this ss.4.5, and it shall be responsible for any
breach of this ss.4.5 by its officers, directors, employees, financial
advisors or other advisors or representatives.
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(e) Notwithstanding ss.4.5(a)(iii), the Board of Directors of Commonwealth
may withdraw or modify in a manner adverse to Empire the approval of the
Board of Directors of Commonwealth of the transactions contemplated hereby
if a Specified Empire Event has occurred and is continuing.
Notice by Commonwealth of Superior Proposal Determination
4.6 Notwithstanding sections 4.5(a), (b), (d) and (e), Commonwealth may accept,
approve, recommend or enter into any agreement, understanding or arrangement in
respect of a Superior Proposal if, and only if, (i) it has provided Empire with
a copy of the Superior Proposal document, (ii) five Business Days shall have
elapsed from the later of the date Empire received written notice advising
Empire that Commonwealth's Board of Directors has resolved, subject only to
compliance with this ss.4.6 and termination of this Agreement, to accept,
approve, recommend or enter into an agreement in respect of such Superior
Proposal, specifying the terms and conditions of such Superior Proposal and
identifying the Person making such Superior Proposal, and the date Empire
received a copy of such Superior Proposal and (iii) it has previously or
concurrently will have (A) paid to Empire the break fee, if any, payable under
ss.6.4 and (B) terminated this Agreement pursuant to ss.6.3. Any information
provided by Commonwealth to Empire pursuant to this ss.4.6 or pursuant to ss.4.5
shall constitute "Information" under ss.4.7(b).
During such five Business Day period, Commonwealth agrees that Empire shall have
the right, but not the obligation, to offer to amend the terms of this
Agreement. The Board of Directors of Commonwealth will review any offer by
Empire to amend the terms of this Agreement in good faith in order to determine,
in its discretion in the exercise of its fiduciary duties, whether Empire's
offer upon acceptance by Commonwealth would result in such Superior Proposal
ceasing to be a Superior Proposal. If the Board of Directors of Commonwealth so
determines, it will enter into an amended agreement with Empire reflecting
Empire's amended proposal. If the Board of Directors of Commonwealth continues
to believe, in good faith and after consultation with financial advisors and
outside counsel, that such Superior Proposal remains a Superior Proposal and
therefore rejects Empire's amended proposal, Commonwealth may terminate this
Agreement pursuant to ss.6.3(c)(iv); provided, however, that Commonwealth must
concurrently pay to Empire the break fee, if any, payable to Empire under ss.6.4
and must concurrently with termination enter into a definitive agreement with
respect to such Acquisition Proposal. Commonwealth acknowledges and agrees that
payment of the break fee, if any, payable under ss.6.4 is a condition to valid
termination of this Agreement under ss.6.3(c)(iv) and this ss.4.6.
Commonwealth also acknowledges and agrees that each successive modification of
any Acquisition Proposal shall constitute a new Acquisition Proposal for
purposes of the requirement under clause (ii) of this ss.4.6 to initiate an
additional five Business Day notice period.
Access to Information
4.7 (a) Subject to sections 4.7(b) and (c) and applicable Laws, upon reasonable
notice, each of Commonwealth and Empire shall (and shall cause each of
their subsidiaries to) afford the other's officers, employees, counsel,
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accountants and other authorized representatives and advisors
("Representatives") access, during normal business hours from the date
hereof and until the earlier of the Effective Date or the termination of
this Agreement, to their properties, books, contracts and records as well
as to its management personnel, and, during such period, Commonwealth and
Empire shall (and shall cause each of their subsidiaries to) furnish
promptly to the other all information concerning that party's business,
properties and personnel as the other may reasonably request. Nothing in
the foregoing shall require a party to disclose information subject to a
written confidentiality agreement with third parties or customer-specific
or competitively sensitive information relating to areas or projects where
a party is in direct competition with the other.
(b) In accordance with the Confidentiality Agreement, each of Empire and
Commonwealth acknowledges that certain information provided to it under
ss.4.7(a) above will be non-public and/or proprietary in nature (the
"Information"). Except as permitted below, each of Empire and Commonwealth
will keep Information confidential and will not, without the prior written
consent of the other, disclose it, in any manner whatsoever, in whole or in
part, to any other Person, and will not use it for any purpose other than
to evaluate the transactions contemplated by this Agreement. Each of Empire
and Commonwealth will make all reasonable, necessary and appropriate
efforts to safeguard the Information from disclosure to anyone other than
as permitted hereby and to control the copies, extracts or reproductions
made of the Information. The Information may be provided to the
Representatives of each of Empire and Commonwealth who require access to
the same to assist it in proceeding in good faith with the transactions
contemplated by this Agreement and whose assistance is required for such
purposes, provided that it has first informed such Representatives to whom
Information is provided that the Representative has the same obligations,
including as to confidentiality, restricted use and otherwise, that it has
with respect to such Information. This provision shall not apply to such
portions of the Information that: (i) are or become generally available to
the public otherwise than as a result of disclosure by a party or its
Representatives; or (ii) become available to a party on a non-confidential
basis from a source other than, directly or indirectly, the other party or
its Representatives, provided that such source is not to the knowledge of
the first party, upon reasonable inquiry, prohibited from transmitting the
Information by a contractual, legal or fiduciary obligation; (iii) were
known to a party or were in its possession on a non-confidential basis
prior to being disclosed to it by the other party or by someone on its
behalf; or (iv) are required by applicable Laws or court order to be
disclosed. The provisions of this ss.4.7(b) shall survive the termination
of this Agreement.
(c) The parties acknowledge that certain Information may be competitively
sensitive and that disclosure thereof shall be limited to that which is
reasonably necessary for the purpose of (i) preparing submissions or
applications in order to obtain the Appropriate Regulatory Approvals, (ii)
preparing the Circular, (iii) avoiding conflicts and (iv) integrating the
operations of Empire and Commonwealth.
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Closing Matters
4.8 Each of the Empire Parties and Commonwealth shall deliver, at the closing of
the transactions contemplated hereby, such customary certificates, resolutions
and other closing documents as may be required by the other parties hereto,
acting reasonably. Two directors of Commonwealth will be appointed to the Empire
board at Closing and Empire shall take all reasonable actions to keep them
elected to the board of Empire for a five-year period.
Indemnification
4.9 (a) Empire agrees that all rights to indemnification or exculpation now
existing in favour of the directors or officers of Commonwealth or any
subsidiary as provided in its articles of incorporation or by-laws in
effect on the date hereof shall survive the Arrangement and shall continue
in full force and effect for a period of not less than three years from the
Effective Time and Empire hereby assumes, effective upon consummation of
the Arrangement, all such liability with respect to any matters arising
prior to the Effective Time.
(b) There shall be maintained in effect, for not less than three years from
the Effective Time, coverage equivalent to that in effect under the current
policies of the directors' and officers' liability insurance maintained by
Commonwealth or any of its subsidiaries, as the case may be, which is no
less advantageous, and with no gaps or lapses in coverages with respect to
matters occurring prior to the Effective Time.
Employment Agreements and Related Matters
4.10 Empire covenants and agrees, and after the Effective Time will cause
Commonwealth or any of its subsidiaries, as the case may be, and any successor
to Commonwealth to agree, to honour and comply with the terms of those existing
employment and severance agreements of Commonwealth or any of its subsidiaries,
as the case may be, which Commonwealth has disclosed to Empire. In particular,
Empire acknowledges Commonwealth has committed to retain the three existing
Commonwealth executives for a minimum of five years for aggregate compensation
of not less than $10,000 per month and to locate them in the White Rock office
to be maintained for an additional $2,000 per month. In addition to the
Replacement Options provided for herein, such executives shall receive directly
a number of Empire stock options equal to 10% of the number of Exchangeable
Shares issued at Closing exercisable at a price of US$3.00 per share for a
five-year period.
Prohibition on Voluntary Liquidation
4.11 The Empire Parties shall not, and agree to cause Empire Holdings to not,
take any action relating to a voluntary liquidation, dissolution or winding-up
of Empire Exchangeco or its successors or Empire Holdings or its successors, as
the case may be, prior to the Redemption Date (as defined in the Plan of
Arrangement).
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Part 5
CONDITIONS
Mutual Conditions Precedent
5.1 The respective obligations of the parties hereto to complete the
transactions contemplated by this Agreement shall be subject to the
satisfaction, on or before the Effective Date, of the following conditions
precedent, each of which may only be waived by the mutual consent of Empire, on
behalf of the Empire Parties, and Commonwealth:
(a) the Arrangement shall have been approved at the Commonwealth Meeting by
not less than two-thirds (66-2/3%) of the votes cast by the holders of
Commonwealth Common Shares who are represented at the Commonwealth Meeting
as well as two-thirds (66-2/3%) of all Commonwealth Securityholders;
(b) the Arrangement shall have been approved at the Commonwealth Meeting in
accordance with any conditions in addition to those set out in ss.5.1(a)
which may be imposed by the Interim Order;
(c) the Interim Order and the Final Order shall each have been obtained in
form and terms satisfactory to each of Commonwealth and Empire, acting
reasonably, and shall not have been set aside or modified in a manner
unacceptable to such parties on appeal or otherwise;
(d) there shall not be in force any order or decree restraining or
enjoining the consummation of the transactions contemplated by this
Agreement and there shall be no proceeding (other than an appeal made in
connection with the Arrangement), of a judicial or administrative nature or
otherwise, brought by a Governmental Entity in progress or threatened that
relates to or results from the transactions contemplated by this Agreement
that would, if successful, result in an order or ruling that would preclude
completion of the transactions contemplated by this Agreement in accordance
with the terms hereof or would otherwise be inconsistent with the
Appropriate Regulatory Approvals which have been obtained;
(e) Empire will have received conditional approval for the Empire Shares to
be listed on either the AMEX market or the CDNX;
(f) this Agreement shall not have been terminated pursuant to Part 6; and
(g) all consents, waivers, permits, orders and approvals of any
Governmental Entity (including the Appropriate Regulatory Approvals), and
the expiry of any waiting periods, in connection with, or required to
permit, the consummation of the Arrangement, the failure of which to obtain
or the non-expiry of which would constitute a criminal offence, or would
have a Material Adverse Effect on Empire or Commonwealth, as the case may
be, shall have been obtained or received on terms that will not have a
Material Adverse Effect on Empire and/or Commonwealth; there shall not be
pending or threatened any suit, action or proceeding by any Governmental
Entity, in each case that has a reasonable likelihood of success, (i)
seeking to prohibit or restrict the acquisition by Empire or any of its
subsidiaries of any Commonwealth Common Shares, seeking to restrain or
prohibit the consummation of the Plan of Arrangement or seeking to obtain
from Commonwealth or Empire any damages that are material in relation to
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Commonwealth and its subsidiaries taken as a whole, (ii) seeking to
prohibit or materially limit the ownership or operation by Empire or any of
its subsidiaries of any material portion of the business or assets of
Commonwealth or any of its subsidiaries or to compel Empire or any of its
subsidiaries to dispose of or hold separate any material portion of the
business or assets of Commonwealth or any of its subsidiaries, as a result
of the Plan of Arrangement, (iii) seeking to impose limitations on the
ability of Empire or any of its subsidiaries to acquire or hold, or
exercise full rights of ownership of, any Commonwealth Common Shares,
including the right to vote the Commonwealth Common Shares purchased by it
on all matters properly presented to the shareholders of Commonwealth, (iv)
seeking to prohibit Empire or any of its subsidiaries from effectively
controlling in any material respect the business or operations of
Commonwealth and its Material Subsidiaries or (v) which otherwise is
reasonably likely to have a Material Adverse Effect on Commonwealth or
Empire.
Additional Conditions Precedent to the Obligations of the Empire Parties
5.2 The obligations of the Empire Parties to complete the transactions
contemplated by this Agreement shall also be subject to the fulfilment of each
of the following conditions precedent (each of which is for the Empire Parties'
exclusive benefit and may be waived by Empire on behalf of the Empire Parties):
(a) all covenants of Commonwealth under this Agreement to be performed on
or before the Effective Date shall have been duly performed by Commonwealth
in all material respects;
(b) the representations and warranties of Commonwealth shall be true and
correct in all material respects as of the Effective Date as if made on and
as of such date (except to the extent such representations and warranties
speak as of an earlier date, in which event such representations and
warranties shall be true and correct in all material respects as of such
earlier date, or except as affected by transactions contemplated or
permitted by this Agreement) and the Empire Parties shall have received a
certificate of Commonwealth addressed to the Empire Parties and dated the
Effective Date, signed on behalf of Commonwealth by two senior executive
officers of Commonwealth, confirming the same as at the Effective Date;
(c) between the date hereof and the Effective Date, there shall not have
occurred a Material Adverse Change to Commonwealth; and
(d) the Board of Directors of Commonwealth shall have adopted all necessary
resolutions, and all other necessary corporate action shall have been taken
by Commonwealth and the subsidiaries to permit the consummation of the
Arrangement.
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The Empire Parties may not rely on the failure to satisfy any of the above
conditions precedent as a basis for non-compliance by the Empire Parties with
their obligations under this Agreement if the condition precedent would have
been satisfied but for a material default by the Empire Parties in complying
with their obligations hereunder.
Additional Conditions Precedent to the Obligations of Commonwealth
5.3 The obligations of Commonwealth to complete the transactions contemplated by
this Agreement shall also be subject to the following conditions precedent (each
of which is for the exclusive benefit of Commonwealth and may be waived by
Commonwealth):
(a) all covenants of the Empire Parties under this Agreement to be
performed on or before the Effective Date shall have been duly performed by
the Empire Parties in all material respects;
(b) all representations and warranties of the Empire Parties under this
Agreement shall be true and correct in all material respects as of the
Effective Date as if made on and as of such date (except to the extent such
representations and warranties speak as of an earlier date, in which event
such representations and warranties shall be true and correct in all
material respects as of such earlier date, or except as affected by
transactions contemplated or permitted by this Agreement) and Commonwealth
shall have received a certificate of each of the Empire Parties addressed
to Commonwealth and dated the Effective Date, signed on behalf of each of
the Empire Parties by two senior executive officers of the relevant Empire
Party, confirming the same as at the Effective Date;
(c) between the date hereof and the Effective Date, there shall not have
occurred a Material Adverse Change to Empire;
(d) the Boards of Directors of the Empire Parties shall have adopted all
necessary resolutions, and all other necessary corporate action shall have
been taken by the Empire Parties to permit the consummation of the
Arrangement and the issue of the Exchangeable Shares and Redeemable Voting
Shares contemplated thereby and the issue of Empire Common Shares pursuant
to the Arrangement and upon the exchange from time to time of the
Exchangeable Shares and the exercise from time to time of the Replacement
Options;
(e) the Common Shares of Empire must trade at a weighted average price of
not less than $1.20 during the five business days prior to Closing;
(f) Empire's share of hydrocarbon production from its properties during the
30 days prior to Closing must average 150 barrels of oil (or BTU
equivalent) per day; and
(g) Empire will have at Closing, working capital calculated in accordance
with generally accepted accounting principles of $100,000.
Commonwealth may not rely on the failure to satisfy any of the above conditions
precedent as a basis for non-compliance by Commonwealth with its obligations
under this Agreement if the condition precedent would have been satisfied but
for a material default by Commonwealth in complying with its obligations
hereunder.
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Notice and Cure Provisions
5.4 The Empire Parties and Commonwealth will give prompt notice to the other of
the occurrence, or failure to occur, at any time from the date hereof until the
Effective Date, of any event or state of facts which occurrence or failure
would, or would be likely to:
(a) cause any of the representations or warranties of the other party
contained herein to be untrue or inaccurate in any material respect on the
date hereof or on the Effective Date; or
(b) result in the failure in any material respect to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by
the other hereunder prior to the Effective Date.
Neither the Empire Parties nor Commonwealth may elect not to complete the
transactions contemplated hereby pursuant to the conditions precedent contained
in sections 5.1, 5.2 and 5.3, or exercise any termination right arising
therefrom, unless forthwith and in any event prior to the filing of the Final
Order for acceptance by the Director, the Empire Parties or Commonwealth, as the
case may be, have delivered a written notice to the other specifying in
reasonable detail all breaches of covenants, representations and warranties or
other matters which the Empire Parties or Commonwealth, as the case may be, are
asserting as the basis for the non-fulfilment of the applicable condition
precedent or the exercise of the termination right, as the case may be. If any
such notice is delivered, provided that the Empire Parties or Commonwealth, as
the case may be, are proceeding diligently to cure such matter, if such matter
is susceptible to being cured, the other may not terminate this Agreement as a
result thereof until the later of January 31, 2001 and the expiration of a
period of 30 days from such notice. If such notice has been delivered prior to
the date of the Commonwealth Meeting, such meeting shall be postponed until the
expiry of such period. If such notice has been delivered prior to the making of
the application for the Final Order or the filing of the Articles of Arrangement
with the Director, such application and such filing shall be postponed until the
expiry of such period. For greater certainty, in the event that such matter is
cured within the time period referred to herein, this Agreement may not be
terminated.
Satisfaction of Conditions
5.5 The conditions precedent set out in ss.5.1, ss.5.2 and ss.5.3 shall be
conclusively deemed to have been satisfied, waived or released when, with the
agreement of Empire and Commonwealth, a certificate of arrangement in respect of
the Arrangement is issued by the Director.
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Part 6
AMENDMENT AND TERMINATION
Amendment
6.1 This Agreement may, at any time and from time to time before or after the
holding of the Commonwealth Meeting but not later than the Effective Date, be
amended by mutual written agreement of the parties hereto, and any such
amendment may, without limitation:
(a) change the time for performance of any of the obligations or acts of
the parties;
(b) waive any inaccuracies or modify any representation contained herein or
in any document delivered pursuant hereto;
(c) waive compliance with or modify any of the covenants herein contained
and waive or modify performance of any of the obligations of the parties;
and
(d) waive compliance with or modify any conditions precedent herein
contained;
provided, however, that any such change, waiver or modification does not
invalidate any required security holder approval of the Arrangement.
Mutual Understanding Regarding Amendments
6.2 (a) The parties will continue, from and after the date hereof and through
and including the Effective Date, to use their respective reasonable
efforts to maximize present and future financial and tax planning
opportunities for the shareholders of Commonwealth, and for Empire and for
Commonwealth as and to the extent that the same shall not prejudice any
party or its security holders. The parties will ensure that such planning
activities do not impede the progress of the Arrangement in any material
way.
(b) The parties agree that if the Empire Parties or Commonwealth, as the
case may be, propose any amendment or amendments to this Agreement or to
the Plan of Arrangement, the other will act reasonably in considering such
amendment and if the other and its shareholders are not prejudiced by
reason of any such amendment the other will co-operate in a reasonable
fashion with the Empire Parties or Commonwealth, as the case may be, so
that such amendment can be effected subject to applicable Laws and the
rights of the security holders.
Termination
6.3 (a) If any condition contained in ss.5.1 or ss.5.2 is not satisfied at or
before the Effective Date to the satisfaction of the Empire Parties, then
Empire on behalf of the Empire Parties may by notice to Commonwealth
terminate this Agreement and the obligations of the parties hereunder
except as otherwise herein provided, but without detracting from the rights
of the Empire Parties arising from any breach by Commonwealth but for which
the condition would have been satisfied.
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(b) If any condition contained in ss.5.1 or ss.5.3 is not satisfied at or
before the Effective Date to the satisfaction of Commonwealth, then
Commonwealth may by notice to Empire on behalf of the Empire Parties
terminate this Agreement and the obligations of the parties hereunder
except as otherwise herein provided, but without detracting from the rights
of Commonwealth arising from any breach by the Empire Parties but for which
the condition would have been satisfied.
(c) This Agreement may:
(i) be terminated by the mutual agreement of Commonwealth and the
Empire Parties (without further action on the part of the Commonwealth
Securityholders if terminated after the holding of the Commonwealth
Meeting);
(ii) be terminated by either Commonwealth or Empire, if there shall be
passed any law or regulation that makes consummation of the
transactions contemplated by this Agreement illegal or otherwise
prohibited or if any injunction, order or decree enjoining Empire or
Commonwealth from consummating the transactions contemplated by this
Agreement is entered and such injunction, order or decree shall become
final and non-appealable;
(iii) be terminated by Empire if (A) the Board of Directors of
Commonwealth shall have failed to recommend or withdrawn or modified
or changed in a manner adverse to Empire its approval or
recommendation of this Agreement or the Arrangement or shall have
recommended an Acquisition Proposal or (B) through the fault of
Commonwealth (whether by commission or omission), this Arrangement is
not, prior to 14 days prior to the Termination Date, submitted for the
approval of the holders of Commonwealth Common Shares and the
Commonwealth Securityholders at the Commonwealth Meeting;
(iv) be terminated by Commonwealth in order to enter into a definitive
written agreement with respect to a Superior Proposal, subject to
compliance with ss.4.6 and the payment of any fee required to be paid
pursuant to ss.6.4(a); or
(v) be terminated by Commonwealth or Empire if Commonwealth Common
Share holder and Commonwealth Securityholder approval shall not have
been obtained by reason of the failure to obtain the required vote at
the Commonwealth Meeting;
in each case, prior to the Effective Date.
(d) If the Effective Date does not occur on or prior to the Termination
Date, then this Agreement shall terminate.
(e) If this Agreement is terminated in accordance with the foregoing
provisions of this ss.6.3, no party shall have any further liability to
perform its obligations hereunder except as provided in ss.6.3(f) and
ss.6.4 and as otherwise contemplated hereby, and provided that, subject to
ss.6.5, neither the termination of this Agreement nor anything contained in
this ss.6.3(e) shall relieve any party from any liability for any breach by
it of this Agreement, including from any inaccuracy in its representations
and warranties and any non-performance by it of its covenants made herein.
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(f) If this Agreement is terminated by Empire for any reason, Empire shall
pay Commonwealth a contribution equal to 50% of the costs of Commonwealth
for legal fees and disbursements and the costs of convening the
Commonwealth Securityholders' Meeting.
Break Fee
6.4 (a) If:
(i) Commonwealth shall terminate this Agreement pursuant to
ss.6.3(c)(iv), unless at the time of such termination, a Specified
Empire Event has occurred and is continuing;
(ii) Empire shall terminate this Agreement pursuant to ss.6.3(c)(iii),
unless at the time of such failure to recommend, withdrawal or adverse
modification or change, or recommendation of an Acquisition Proposal,
a Specified Empire Event has occurred and is continuing; or
(iii) either Commonwealth or Empire shall terminate this Agreement
pursuant to ss.6.3(c)(v) in circumstances where Commonwealth
Securityholder approval has not been obtained at the Commonwealth
Meeting, and (x) a bona fide Acquisition Proposal has been made by any
person other than a Empire Party prior to the Commonwealth Meeting and
not withdrawn more than five days prior to the vote of the
Commonwealth Securityholders and (y) Commonwealth enters into an
agreement with respect to an Acquisition Proposal, or an Acquisition
Proposal is consummated, after the date hereof and prior to the
expiration of 18 months following termination of this Agreement,
unless at the time of the Commonwealth Meeting a Specified Empire
Event has occurred and is continuing;
then in any such case Commonwealth shall pay to Empire US$10,000 in
immediately available funds to an account designated by Empire. Such
payment shall be due (A) in the case of a termination specified in clause
(i), prior to the termination of this Agreement, (B) in the case of a
termination specified in clause (ii), within five Business Days after
written notice of termination by Empire or (C) in the case of a termination
specified in clause (iii), at or prior to the earlier of the entering into
of the agreement and the consummation of the transaction referred to
therein. Commonwealth shall not be obligated to make more than one payment
pursuant to this ss.6.4(a).
(b) If the holders of the Commonwealth Common Shares shall fail to approve
the Arrangement (unless a Specified Empire Event has occurred and is
continuing) at the Commonwealth Meeting, then at 11:00 a.m., Vancouver
time, on the first Business Day following the Commonwealth Meeting,
Commonwealth shall pay to Empire US$10,000 as payment in full of the Empire
Parties' out-of-pocket costs and expenses in connection with the
transaction contemplated by this Agreement in immediately available funds
to an account designated by Empire. Any payment due under ss.6.4(a) shall
be reduced dollar-for-dollar by any payment previously made under this
ss.6.4(b).
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Effect of Break Fee Payment
6.5 For greater certainty, the parties hereto agree that if Commonwealth pays to
Empire amounts required by ss.6.4(a) as a result of the occurrence of any of the
events referenced in ss.6.4(a), the Empire Parties shall have no other remedy
for any breach of this Agreement by Commonwealth.
Remedies
6.6 Subject to ss.6.5, the parties hereto acknowledge and agree that an award of
money damages would be inadequate for any breach of this Agreement by any party
or its representatives and any such breach would cause the non-breaching party
irreparable harm. Accordingly, the parties hereto agree that, in the event of
any breach or threatened breach of this Agreement by one of the parties, the
non-breaching party will also be entitled, without the requirement of posting a
bond or other security, to equitable relief, including injunctive relief and
specific performance. Such remedies will not be the exclusive remedies for any
breach of this Agreement but will be in addition to all other remedies available
at law or equity to each of the parties.
Part 7
GENERAL
Notices
7.1 All notices and other communications which may or are required to be given
pursuant to any provision of this Agreement shall be given or made in writing
and shall be deemed to be validly given if served personally or by telecopy, in
each case addressed to the particular party at:
(a) If to Commonwealth, at:
Commonwealth Energy Corp.
Suite 211
2383 King George Hwy
White Rock, BC V4A 5A4
Attention: Mr. Lorne Torhjelm, President and CEO
Telecopier No.: (604) 536-2369
with a copy to:
Lang Michener Lawrence & Shaw
1500 - 1055 West Georgia Street
Vancouver, BC V6E 4N7
Attention: Mr. Bernie Zinkhofer
Telecopier No.: (604) 685-7084
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(b) If to an Empire Party, at:
Empire Energy Corporation
Suite 1215, 7500 College Blvd.
Overland Park, Kansas 66210 USA
Attention: Mr. Norm Peterson, President
Telecopier No.: (913) 469-1544
with a copy to:
Mr. Troy Renkemeyer
Attorney
900 Lighton Plaza Tower
7500 College Blvd.
Overland Park, Kansas 66210 USA
Telecopier No.: (913) 906-9840
or at such other address of which any party may, from time to time, advise the
other parties by notice in writing given in accordance with the foregoing. The
date of receipt of any such notice shall be deemed to be the date of delivery or
telecopying thereof.
Assignment
7.2 No party hereto may assign its rights or obligations under this Agreement or
the Arrangement.
Binding Effect
7.3 This Agreement and the Arrangement shall be binding upon and shall enure to
the benefit of the parties hereto and their respective successors and no third
party shall have any rights hereunder.
Waiver and Modification
7.4 Commonwealth and the Empire Parties may waive or consent to the modification
of, in whole or in part, any inaccuracy of any representation or warranty made
to them hereunder or in any document to be delivered pursuant hereto and may
waive or consent to the modification of any of the covenants herein contained
for their respective benefit or waive or consent to the modification of any of
the obligations of the other parties hereto. Any waiver or consent to the
modification of any of the provisions of this Agreement, to be effective, must
be in writing executed by the party granting such waiver or consent.
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No Personal Liability
7.5 (a) No director or officer of any Empire Party shall have any personal
liability whatsoever to Commonwealth under this Agreement, or any other
document delivered in connection with the Arrangement on behalf of a Empire
Party.
(b) No director or officer of Commonwealth shall have any personal
liability whatsoever to any Empire Party under this Agreement, or any other
document delivered in connection with the Arrangement on behalf of
Commonwealth.
Further Assurances
7.6 Each party hereto shall, from time to time, and at all times hereafter, at
the request of the other parties hereto, but without further consideration, do
all such further acts and execute and deliver all such further documents and
instruments as shall be reasonably required in order to fully perform and carry
out the terms and intent hereof.
Expenses
7.7 (a) Subject to ss.6.4, the parties agree that all out-of-pocket expenses of
the parties relating to the Arrangement and the transactions contemplated
hereby, including legal fees, accounting fees, financial advisory fees,
regulatory filing fees, all disbursements of advisors and printing and
mailing costs, shall be paid by the party incurring such expenses.
(b) Commonwealth represents and warrants to the Empire Parties that no
broker, finder or investment banker is or will be entitled to any
brokerage, finder's or other fee or commission from Commonwealth or any
subsidiary of Commonwealth in connection with the transactions contemplated
hereby or by the Arrangement.
Consultation
7.8 Empire and Commonwealth agree to consult with each other as to the general
nature of any news releases or public statements with respect to this Agreement
or the Arrangement, and to use their respective reasonable efforts not to issue
any news releases or public statements inconsistent with the results of such
consultations. Subject to applicable Laws, each party shall use its reasonable
efforts to enable the other parties to review and comment on all such news
releases prior to the release thereof. The parties agree to issue jointly a news
release with respect to this Arrangement as soon as practicable following the
execution of this Agreement. Empire and Commonwealth also agree to consult with
each other in preparing and making any filings and communications in connection
with any Appropriate Regulatory Approvals.
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Governing Laws
7.9 This Agreement shall be governed by and construed in accordance with the
laws of the Province of Alberta and the laws of Canada applicable therein and
shall be treated in all respects as a Alberta contract. Each party hereby
irrevocably attorns to the jurisdiction of the courts of the Province of Alberta
in respect of all matters arising under or in relation to this Agreement.
Time of Essence
7.10 Time shall be of the essence in this Agreement.
Counterparts
7.11 This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the
date first written above.
EMPIRE ENERGY CORPORATION
Per:
--------------------------------------------
Authorized Signatory
EMPIRE EXCHANGECO LIMITED
being 3828395 Canada Ltd.
Per:
--------------------------------------------
Authorized Signatory
COMMONWEALTH ENERGY CORP.
Per:
--------------------------------------------
Authorized Signatory
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SCHEDULE A
Form of Affiliate's Letter
Dear Sirs:
The undersigned, a holder of common shares ("Commonwealth Common Shares") of
Commonwealth Energy Corp. ("Commonwealth"), a corporation existing under the
laws of Canada is entitled to receive in connection with the arrangement
pursuant to Section 192 of the Canada Business Corporations Act, R.S.C. 1995, c.
C-44 (the "Arrangement") to be entered into pursuant to the Merger Agreement
dated as of December 12, 2000 among Commonwealth, Empire Energy Corporation, a
corporation existing under the laws of the State of Utah ("Empire"), and Empire
Exchangeco Ltd., a company existing under the laws of Canada ("Empire
Exchangeco"), exchangeable shares (the "Exchangeable Shares") of Empire
Exchangeco. The undersigned acknowledges that the undersigned may be deemed an
"affiliate" of Empire within the meaning of Rule 145 ("Rule 145") promulgated
under the U.S. Securities Act of 1933, as amended (the "Securities Act"), by the
U.S. Securities and Exchange Commission (the "SEC"), although nothing contained
herein should be construed as an admission of such fact or a waiver of any
rights the undersigned may have to object to any claim that the undersigned is
such an affiliate.
If in fact the undersigned were such an affiliate, the undersigned's ability to
sell, assign or transfer:
(a) the Exchangeable Shares received by the undersigned in exchange for any
Commonwealth Common Shares in connection with the Arrangement; and
(b) any shares of common stock of Empire (collectively, with the
Exchangeable Shares, the "Securities") for which the Exchangeable Shares
may be exchanged;
may be restricted unless such transaction is registered under the Securities Act
or an exemption from such registration is available. The undersigned understands
that such exemptions are limited and the undersigned has obtained or will obtain
advice of counsel as to the nature and conditions of such exemptions, including
information with respect to the applicability to the sale of the Securities of
Rules 144 and 145(d) promulgated under the Securities Act. The undersigned
understands that Empire will not be required to maintain the effectiveness of
any registration statement under the Securities Act for the purpose of resale of
Securities by the undersigned.
The undersigned hereby represents and covenants with Empire that the undersigned
will not sell, assign or transfer any of the Securities received by the
undersigned in exchange for Commonwealth Common Shares in connection with the
Arrangement except:
(a) pursuant to an effective registration statement under the Securities
Act;
(b) in conformity with Rule 145; or
(c) in a transaction which, in the opinion of the general counsel of Empire
or other counsel reasonably satisfactory to Empire or as described in a
"no-action" or interpretative letter from the staff of the SEC specifically
issued with respect to a transaction to be engaged in by the undersigned,
is not required to be registered under the Securities Act.
<PAGE>
In the event of a sale or other disposition by the undersigned of Securities
pursuant to Rule 145, the undersigned will supply Empire with evidence of
compliance with such Rule, in the form of a letter substantially in the form of
Annex I hereto.
Empire covenants that it will take all such actions as may be reasonably
available to it to permit the sale or other disposition of Securities by the
undersigned under Rule 145 in accordance with the terms thereof.
The undersigned also understands that there will be placed on any certificates
for the Securities issued to the undersigned a legend stating in substance:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF ONLY IN ACCORDANCE WITH THE TERMS OF A LETTER AGREEMENT BETWEEN THE
REGISTERED HOLDER HEREOF AND EMPIRE ENERGY CORP., A COPY OF WHICH AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICES OF EMPIRE ENERGY CORPORATION."
The undersigned also understands that unless a sale or transfer by the
undersigned of the undersigned's Securities has been registered under the Act or
is a sale made in conformity with the provisions of Rule 145 under the Act,
Empire reserves the right to put the following legend on the certificates issued
to the undersigned's transferee:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO RECEIVED SUCH
SECURITIES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES
ACT OF 1933 APPLIES. THE SECURITIES HAVE NOT BEEN ACQUIRED BY THE HOLDER WITH A
VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE
MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth above shall be removed by
delivery of substitute certificates without such legend if (i) the securities
represented thereby have been registered for sale by the undersigned under the
Securities Act or (ii) Empire has received either an opinion of counsel, which
opinion and counsel shall be reasonably satisfactory to Empire, or a "no-action"
letter obtained by the undersigned from the staff of the Commission, to the
effect that the restrictions imposed by Rule 145 under the Act no longer apply
to the undersigned.
2
<PAGE>
The undersigned acknowledges that:
(a) the undersigned has carefully read this letter and understands the
requirements hereof and the limitations imposed upon the distribution,
sale, transfer or other disposition of the Securities, and
(b) the receipt by Empire and Empire Exchangeco of this letter is an
inducement to Empire and Empire Exchangeco to consummate the Agreement.
Very truly yours,
DATED:
--------------------------------------------
Accepted and agreed to this _____ day of __, 2001.
EMPIRE ENERGY CORPORATION
Per:
--------------------------------------------
Authorized Signatory
3
<PAGE>
ANNEX I
[Name]
On __, the undersigned sold the securities below (the "Securities"). The
Securities were received by file undersigned in connection with the arrangement
pursuant to section 192 of the Canada Business Corporations Act, R.S.C. 1995, c.
C-44 entered into pursuant to the Merger Agreement dated as of November __, 2000
among Commonwealth Energy Corp., a corporation existing under the laws of
Canada, Empire Energy Corporation, a corporation existing under the laws of the
State of Utah ("Empire"), and Empire Exchangeco Ltd., a company existing under
the laws of Canada.
The undersigned hereby represents to Empire that the sale of the Securities was
made in compliance with Rule 145 promulgated under the U.S. Securities Act of
1933, as amended.
Very truly yours,
[Space to be provided for description of the Securities sold]
<PAGE>
SCHEDULE B
APPROPRIATE REGULATORY APPROVALS
Canada
o exemption orders (or legal opinions that such orders are not necessary)
from the provincial securities regulators from the registration and
prospectus requirements with respect to the Exchangeable Share structure
o approval to delist of the Canadian Venture Exchange Inc.
United States and Other
o conditional approval of AMEX or the CDNX regarding the listing of the
Empire Common Shares on AMEX or CDNX subject to official notice of issuance
<PAGE>
SCHEDULE C
ARRANGEMENT RESOLUTIONS
RESOLVED, as special resolutions, that:
1. The arrangement (the "Arrangement") under Section 192 of the Canada
Business Corporations Act (the "CBCA") involving Commonwealth Energy Corp.
("Commonwealth"), as more particularly described and set forth in the
Management Information Circular (the "Circular") of Commonwealth dated
January 8, 2001 accompanying the notice of this meeting (as the Arrangement
may be modified or amended) is hereby authorized, approved and adopted.
2. The plan of arrangement (the "Plan of Arrangement") involving Commonwealth,
the full text of which is set out as Schedule A to the Circular (as the
Plan of Arrangement may be or may have been amended) is hereby approved and
adopted.
3. Notwithstanding that this resolution has been passed (and the Arrangement
adopted) by the Commonwealth Securityholders or that the Arrangement has
been approved by the Court of Queen's Bench Alberta, the directors of
Commonwealth are hereby authorized and empowered (i) to amend the
Arrangement Agreement, or the Plan of Arrangement to the extent permitted
by the Arrangement Agreement, and (ii) not to proceed with the arrangement
without further approval of the Commonwealth Securityholders, but only if
the Arrangement Agreement is terminated in accordance with Article 6
thereof.
4. Any officer or director of Commonwealth is hereby authorized and directed
for and on behalf of Commonwealth to execute, under the seal of
Commonwealth or otherwise, and to deliver articles of arrangement and such
other documents as are necessary or desirable to the Director under the
CBCA in accordance with the Arrangement Agreement for filing.
5. Any officer or director of Commonwealth is hereby authorized and directed
for and on behalf of Commonwealth to execute or cause to be executed, under
the seal of Commonwealth or otherwise, and to deliver or cause to be
delivered, all such other documents and instruments and to perform or cause
to be performed all such other acts and things as in such person's opinion
may be necessary or desirable to give full effect to the foregoing
resolution and the matters authorized thereby, such determination to be
conclusively evidenced by the execution and delivery of such document,
agreement or instrument or the doing of any such act or thing.
<PAGE>
Please note: Schedules D, E, F and H are incorporated in separate documents,
requiring separate e-mail transmission.
<PAGE>
SCHEDULE G
COMMONWEALTH CAPITALIZATION TABLE
COMMONWEALTH ENERGY CORP.
SHARE STRUCTURE
------------------------------------------------------------------------------
ISSUED & OUTSTANDING 32,578,544
------------------------------------------------------------------------------
STOCK OPTIONS GRANTED AT 600,000
$0.20 / SHARE
------------------------------------------------------------------------------
STOCK OPTIONS GRANTED AT 600,000
$0.25 / SHARE
------------------------------------------------------------------------------
STOCK OPTIONS GRANTED AT 1,678,504
$0.30 / SHARE
------------------------------------------------------------------------------
STOCK OPTIONS GRANTED AT 50,000
$0.45 / SHARE
------------------------------------------------------------------------------
WARRANTS ISSUED AT 974,612
$0.30 / SHARE
------------------------------------------------------------------------------
CURRENT FULLY DILUTED OUTSTANDING SHARES 36,481,660
------------------------------------------------------------------------------
*NOTE: The current Private Placement being conducted at $0.25 / Share which
has not yet closed will add an additional 2,000,000 Shares and
2,000,000 Warrants (exercisable at $0.30 / Share) to the above totals.
<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH ENERGY CORP.
STOCK OPTIONS SUMMARY
----------------------- --------------------- ----------------- ---------------------- ------------------
Name & Position Number of Common Exercise Price Date of Grant Expiry Date
Shares under Option / Common Share
----------------------- --------------------- ----------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Lorne Torhjelm, 500,000 0.20 / Share November 30, 1999 November 30, 2004
(President, CEO & 563,436 0.30 / Share January 18, 2000 January 18, 2005
Director)
----------------------- --------------------- ----------------- ---------------------- ------------------
Robert C. Stewart 50,663 0.30 / Share December 21, 1998 December 21, 2003
(Secretary & Director) 600,000 0.25 / Share October 23, 2000 October 23, 2005
----------------------- --------------------- ----------------- ---------------------- ------------------
Sieg Deckert 514,405 0.30 / Share January 18, 2000 January 18, 2005
(Director)
----------------------- --------------------- ----------------- ---------------------- ------------------
Doug Wolters 100,000 0.30 / Share December 21, 1998 December 21, 2003
(Office Manager) 100,000 0.20 / Share November 30, 1999 November 30, 2004
50,000 0.45 / Share April 17, 2000 April 17, 2005
----------------------- --------------------- ----------------- ---------------------- ------------------
Gordon Bradford 250,000 0.30 / Share January 18, 2000 January 18, 2005
(Director)
----------------------- --------------------- ----------------- ---------------------- ------------------
Fred Chelstad 200,000 0.30 / Share January 18, 2000 January 18, 2005
(Director)
----------------------- --------------------- ----------------- ---------------------- ------------------
Total: 2,928,504
----------------------- --------------------- ----------------- ---------------------- ------------------
</TABLE>
<PAGE>
COMMONWEALTH ENERGY CORP.
WARRANTS OUTSTANDING
--------------------------------------------------------------------------------
Sieg Deckert: 300,000 @ $0.30 from January, 2000 Private Placement.
369,612 @ $0.30 from July, 1999 Private Placement.
Doug Wolters: 37,500 @ $0.30 from January, 2000 Private Placement.
5,000 @ $0.30 from July, 1999 Private Placement.
Abe Reimer: 250,000 @ $0.30 from July, 1999 Private Placement.
Gil Tritten: 10,000 @ $0.30 from July, 1999 Private Placement.
Oscar Amyotte: 2,500 @ $0.30 from July, 1999 Private Placement.
*The July, 1999 Private Placement Warrants expire on July 29, 2001.
*The January, 2000 Private Placement Warrants expire on March 13, 2001.
*Figures do not include Warrants from the current Private Placement being
conducted at $0.25 / share with warrants attached at $0.30 / share. This Private
Placement has not closed as of November 23, 2000.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE H
EMPIRE CAPITALIZATION TABLE
Empire Energy Corporation
Warrants, Option Awards and Balances Total Shares Issued and Outstanding (Thru 11/27/00): 13,712,062 NOTE: Empire owns 750,000
of these shares.
Activity ending October 31, 2000 Float = 1,498,629 shares
------------------- Later or Post split
Year 1999 activity Option Market Immediate Annual Other
------------------- Shares Price Price Vesting Vesting Vesting Shares Price Extended
-----------------------------------------------------------------------------------------------------------------------------------
24-Mar-99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Norman Peterson Director President 25,000 $1.50 Not trading 5,000 5,000 15,000 62,500 $0.60 $37,500
John Dixon Director 25,000 $1.50 Not trading 5,000 5,000 15,000 62,500 $0.60 $37,500
John Hersma Director 25,000 $1.50 Not trading 5,000 5,000 15,000 62,500 $0.60 $37,500
Elliot Kaplan Director 25,000 $1.50 Not trading 5,000 5,000 15,000 62,500 $0.60 $37,500
John Garrison Director Secretary 25,000 $1.50 Not trading 5,000 5,000 15,000 62,500 $0.60 $37,500
Owen Enterprises LLC Consultant 240,000 $1.50 Not trading 240,000 600,000 $0.60 $360,000
11-May-99
Bryan Ferguson Employee VP 60,000 $2.50 Not trading 20,000 20,000 20,000 150,000 $1.00 $150,000
11-Aug-99
John Garrison Director 30,000 $2.50 $2.50 10,000 10,000 10,000 75,000 $1.00 $75,000
Allen Reeves Attorney 50,000 $2.50 $2.50 50,000 125,000 $1.00 $125,000
Karen Taylor Employee of
contractor 20,000 $2.50 $2.50 10,000 5,000 5,000 50,000 $1.00 $50,000
Phil Snowden Contractor 59,800 $2.50 $2.50 9,800 25,000 Concession 149,500 $1.00 $149,500
25,000 Revenue
Clark Burns Contractor 60,400 $2.50 $2.50 10,400 25,000 Concession 151,000 $1.00 $151,000
25,000 Revenue
Ted Abele Contractor 7,600 $2.50 $2.50 7,600 19,000 $1.00 $19,000
John Dixon Director Contractor 10,000 $2.50 $2.50 10,000 25,000 $1.00 $25,000
Robert Kane Contractor 1,600 $2.50 $2.50 1,600 4,000 $1.00 $4,000
Options Exercised
John Dixon -12,500 $0.60 ($7,500)
Total options awarded 664,400 394,400 60,000 210,000 1,648,500 $1,288,500
split
adjustment 2.5 1,661,000 986,000 150,000 525,000
-------------------
Year 2000 activity
-----------------------------------------------------------------------------------------------------------------------------------
Options Exercised
Owen Enterprises LLC -150,000 $0.60 ($90,000)
Bryan Ferguson -10,000 $1.00 ($10,000)
Options Awarded
Bryan Ferguson 100,000 $2.50 $2.50 50,000 50,000 100,000 $2.50 $250,000
Total options
outstanding 1,761,000 1,036,000 150,000 575,000 1,588,500 $1,438,500
-----------------------------------------------------------------------------------------------------------------------------------
Warrants # Issued Exercise Expiration Comments
----------- Price Date
Torreon Holdings, Inc. 11,000,000 $3.00 June, 2001 The warrants are non-cancelable but callable at .001 cents
per warrant if not exercised within 60 days after Empire
stock trades at 185% of the exercise price on a public
market for 30 consecutive calendar days. NOTE: It is
anticipated that these warrants will not be exercised by
Torreon as they do not have the capital necessary to
transact, as such, it is fully expected that they will
expire without effect.
</TABLE>
<PAGE>
EMPIRE ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Attached are the historical audited financial statements of Commonwealth Energy
Corporation ("Commonwealth") for the acquisition of Commonwealth by Empire
Energy Corporation ("Empire") (a development stage company). The historical
statements of Natural Gas Revenues and Direct Operating Expenses of certain gas
producing properties located in the state of Texas (the "Acquisition
Properties") are not included as the Acquisition Properties had no operations
during the period from January 1, 1999 to September 30, 2000. The unaudited pro
forma consolidated condensed financial statements have been prepared utilizing
the historical financial statements of Empire. The unaudited pro forma
consolidated condensed financial statements should be read in conjunction with
the historical financial statements of Empire and the attached historical
financial statements of Commonwealth.
The following unaudited pro forma consolidated condensed statements of
operations for the year ended December 31, 1999, for the nine months ended
September 30, 2000 and for the period from March 21, 1995 (inception) to
September 30, 2000 and the unaudited pro forma consolidated condensed balance
sheet as of September 30, 2000 give effect to the acquisition of Commonwealth
and the Acquisition Properties including the related pro forma adjustments
described in the notes thereto. The unaudited pro forma consolidated condensed
statements of operations for the year ended December 31, 1999, the nine months
ended September 30, 2000 and for the period from March 21, 1995 (inception) to
September 30, 2000 give effect to the acquisitions by Empire as if the
acquisitions, accounted for as purchases, had occurred on January 1, 1999 for
the year ended December 31, 1999 and January 1, 2000 for the nine months ended
September 30, 2000 and the cumulative since inception. The unaudited pro forma
consolidated condensed balance sheet as of September 30, 2000 gives effect to
the acquisitions as if they had occurred on September 30, 2000. The pro forma
financial statements reflect the preliminary allocation of the purchase prices.
The purchase price for the Commonwealth and Acquisition Properties will be
finalized upon the completion of management's review and resolution of the
purchase contingencies.
The unaudited pro forma consolidated condensed financial statements may not be
indicative of the results that actually would have occurred if the acquisitions
had been effective on the dates indicated or which may be obtained in the
future.
F-1
<PAGE>
<TABLE>
<CAPTION>
EMPIRE ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
---------------------------------------------------------------------------------------------------------------------------
ASSETS
------
Unaudited
Historical September 30, 2000 Pro Forma
----------------------------- Pro Forma September 30,
Empire Commonwealth Adjustments 2000
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 46,368 $ 59,458 (a) $ 345,000 $ 450,826
Bond -- 45,000 45,000
Accounts receivable, net 40,500 45,891 -- 86,391
Inventories 179,158 -- 179,158
Prepaids -- 2,469 2,469
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 266,026 152,818 345,000 763,844
PROPERTY AND EQUIPMENT, NET 65,443 -- -- 65,443
OIL AND GAS PROPERTIES, NET -- 3,829,518 (b) (200,000) 4,610,718
(c) 981,200
OTHER ASSETS:
Marketable securities 59,291 -- 59,291
Receivables - related party 109,595 5,215 -- 114,810
----------- ----------- ----------- -----------
TOTAL ASSETS $ 500,355 $ 3,987,551 $ 1,126,200 $ 5,614,106
=========== =========== =========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES
Accounts payable and accrued
expenses $ 885 $ 286,685 (b) $ 250,000 $ 537,570
Advances from directors -- 120,714 -- 120,714
Notes payable - related parties 20,000 -- -- 20,000
Convertible debentures 22,500 -- -- 22,500
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 43,385 407,399 250,000 700,784
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY
--------------------
STOCKHOLDERS' EQUITY
Common stock 13,712 4,469,415 (a) 345,000 21,259
(b) 5,763
(b) (4,814,415)
(c) 1,784
Stock subscriptions -- 3,700 (b) (3,700) --
Additional paid-in-capital 3,923,776 -- (b) 3,469,389 8,372,581
(c) 979,416
Treasury stock (562,500) -- -- (562,500)
Accumulated other comprehensive --
loss (21,906) -- -- (21,906)
Previous accumulated deficit (1,867,999) -- -- (1,867,999)
Accumulated deficit (1,028,113) (892,963) (b) 892,963 (1,028,113)
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 456,970 3,580,152 876,200 4,913,322
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 500,355 $ 3,987,551 $ 1,126,200 $ 5,614,106
=========== =========== =========== ===========
------------------------------------------------------------------------------------------------------------------------
See notes to unaudited pro forma consolidated condensed financial statements.
F-2
<PAGE>
EMPIRE ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999
------------------------------------------------------------------------
Pro Forma Unaudited
Empire Commonwealth Adjustments Pro Forma
------------ ------------ ----------- ------------
OIL AND GAS SALES $ 69,401 $ 100,591 $ -- $ 169,992
EXPENSES
Lease operating 1,100 105,336 -- 106,436
Depreciation, depletion, amortization
and impairment 72,345 163,320 -- 235,665
Interest 24,250 36,367 -- 60,617
Foreign exchange gain -- (15,285) -- (15,285)
General and administrative 559,588 214,880 -- 774,468
------------ ------------ ------------ ------------
TOTAL EXPENSES 657,283 504,618 -- 1,161,901
------------ ------------ ------------ ------------
OPERATING LOSS (587,882) (404,027) -- (991,909)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $ (587,882) $ (404,027) $ -- $ (991,909)
============ ============ ============ ============
Net loss per common share $ (0.05)
============
Weighted Average Shares Outstanding 18,429,876
============
-----------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited pro forma consolidated condensed financial statements.
F-3
<PAGE>
EMPIRE ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2000
--------------------------------------------------------------------
Pro Forma Unaudited
Empire Commonwealth Adjustments Pro Forma
------------ ------------ ----------- ------------
OIL AND GAS SALES $ 414,826 $ 154,316 $ -- $ 569,142
EXPENSES
Lease operating 8,401 76,218 -- 84,619
Depreciation, depletion, amortization
and impairment 262,993 52,171 -- 315,164
Interest, net (3,885) 17,418 -- 13,533
Foreign exchange gain -- -- --
Loss from equity investment 4,375 -- 4,375
General and administrative 451,960 228,046 -- 680,006
------------ ------------ ------------ ------------
TOTAL EXPENSES 723,844 373,853 -- 1,097,697
------------ ------------ ------------ ------------
OPERATING LOSS (309,018) (219,537) -- (528,555)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations (309,018) (219,537) -- (528,555)
Discontinued Operations:
Loss from operations of high
level marketing segment to be
disposed of and internet segment
disposed of in September 2000 (392,579) -- -- (392,579)
Gain on disposal of internet segment 274,075 -- -- 274,075
------------ ------------ ------------ ------------
Net Loss $ (427,522) $ (219,537) $ -- $ (647,059)
============ ============ ============ ============
Loss Per Share:
Loss from continuing operations $ (0.03)
Loss from discontinued operations (0.02)
Estimated gain on disposal of Internet segment 0.01
------------
Net loss per common share $ (0.04)
============
Weighted Average Shares Outstanding 19,986,595
============
-----------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited pro forma consolidated condensed financial statements.
F-4
<PAGE>
EMPIRE ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------------
Period from March 21, 1995 (Inception) to September 30, 2000
------------------------------------------------------------
Pro Forma Unaudited
Empire Commonwealth Adjustments Pro Forma
----------- ------------ ----------- -----------
OIL AND GAS SALES $ 484,227 $ 154,316 $ -- $ 638,543
EXPENSES
Lease operating 9,501 76,218 -- 85,719
Depreciation, depletion, amortization
and impairment 335,338 52,171 -- 387,509
Interest, net 20,365 17,418 -- 37,783
General and administrative 1,074,743 228,046 -- 1,302,789
----------- ----------- --------- -----------
TOTAL EXPENSES 1,439,947 373,853 -- 1,813,800
----------- ----------- --------- -----------
OPERATING LOSS (955,720) (219,537) -- (1,175,257)
Provision for income taxes (300) -- -- (300)
----------- ----------- --------- -----------
Loss from continuing operations (956,020) (219,537) -- (1,175,557)
Discontinued Operations:
Loss from operations of high
level marketing segment to be
disposed of and internet segment
disposed of in September 2000 (392,579) -- -- (392,579)
Gain on disposal of internet segment 274,075 -- -- 274,075
----------- ----------- --------- -----------
Loss before extraordinary item (1,074,524) (219,537) -- (1,294,061)
Extraordinary item 255,528 -- -- 255,528
----------- ----------- --------- -----------
Net Loss $ (818,996) $ (219,537) $ -- $(1,038,533)
=========== =========== ========= ===========
Loss Per Share:
Loss from continuing operations $ (0.19)
Loss from discontinued operations (0.06)
Estimated gain on disposal of Internet segment 0.04
-----------
Loss per share before extraordinary item (0.21)
Extraordinary item 0.04
-----------
Net loss per common share (0.17)
===========
Weighted Average Shares Outstanding 6,287,347
===========
-----------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited pro forma consolidated condensed financial statements.
F-5
</TABLE>
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Acquisition of Certain Gas Properties
-------------------------------------
In November and December 2000, Empire Energy Corporation ("Empire") acquired
approximately 44.6% working interest in approximately 704 acres of gas reserve
properties in Leon County, Texas primarily from Trend Capital Corporation. The
total consideration paid was 1,784,000 shares of common stock with a fair value
of approximately $981,200. In addition, Commonwealth Energy Corporation
("Commonwealth") owns an additional 50% working interest in the same property
(see acquisition of Commonwealth below).
The acquired properties are estimated to contain approximately 30 billion cubic
feet (Bcf) of proved gas reserves. As of November 2000, the acquired properties
were not generating revenues.
Acquisition of Commonwealth
---------------------------
On December 12, 2000, Empire entered into an agreement to acquire 100% of
Commonwealth in a stock exchange on the basis of 6 shares of Commonwealth for 1
share of Empire. As a result, Empire will exchange approximately 5,763,091
shares of its stock for all the issued and outstanding common stock of
Commonwealth. Additionally, Empire granted 488,084 options and 495,768 warrants
to replace Commonwealth options and warrants currently outstanding on a 1 for 6
basis. The replacement options and warrants have exercise prices ranging from
$1.20 to $2.70 and expire within approximately 6 months to 5 years.
Included in these pro forma consolidated condensed financial statements are the
proceeds and issuance of shares related to a Commonwealth private placement
expected to be closed subsequent to September 30, 2000. The private placement
consists of 2,000,000 units, each unit consisting of 1 share of Commonwealth
stock and 1 two year warrant to purchase Commonwealth stock at $.30 Canadian per
share for total proceeds of approximately $345,000. Included in the 5,763,091
shares to be issued to Commonwealth are 333,333 related to the exchange for the
2,000,000 shares in the uncompleted private placement. Additionally, 333,333 of
the replacement warrants to be granted are for the 2,000,000 warrants in the
uncompleted private placement.
The acquisition of Commonwealth is subject to, amongst other things, regulatory
and shareholder approvals. The fair value of the common stock to be issued by
Empire and the fair values of the net assets of Commonwealth to be acquired will
F-6
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Acquisition of Commonwealth (Continued)
---------------------------------------
ultimately be determined at the date of closing of the transaction. Therefore,
it is likely that the fair values will vary from those shown in the pro forma
consolidated condensed financial statements and the differences may be material.
The unaudited pro forma adjustments are as follows:
a. To record the effect of closing the private placement of 333,000
shares of common stock and 333,333 of warrants for $345,000.
b. To record the acquisition of Commonwealth under the purchase method:
Net assets acquired at fair value:
Current assets $ 497,818
Property and equipment 3,629,518
Other assets 5,215
Current liabilities (407,399)
----------
$3,725,152
==========
Consideration comprised of 5,763,091
common shares of Empire $3,141,152
Estimated transaction costs 250,000
Estimated consideration for replacement
options and warrants 334,000
----------
$3,725,152
==========
c. To record the issuance of 1,784,000 shares of common stock with a fair
value of $981,200 for the acquisition of gas properties in Texas.
F-7
<PAGE>
ACQUISITION PROPERTIES
SUPPLEMENTAL INFORMATION ON GAS RESERVES (UNAUDITED)
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. All reserves are located in the United States. The
following reserve data represent estimates only and should not be constructed as
the current market value of the Acquisition Properties of the cost that would be
incurred to obtain equivalent reserves.
An analysis of the estimated changes in quantities of proved natural gas
reserves for the nine months ended September 30, 2000 is shown below:
Proved Developed Reserves: September 30,
2000
-------------
Beginning of period -
Production -
Revisions of previous estimates -
Extensions and discoveries 3,117
-----
End of year Proved Developed
Reserves 3,117
=====
The estimated standardized measure of discounted future net cash flows relating
to proved reserves at September 30, 2000 is shown below, in thousands. No
deductions were made for general overhead, depletion, depreciation, and
amortization, debt service and income taxes or any indirect costs.
September 30,
2000
-------------
Future cash inflows $ 16,356
Future production costs (693)
Future development costs (386)
-------
Future net cash flows 15,277
10% annual discount for estimated
timing of cash flows (10,310)
-------
Standardized measure of discounted future net
cash flows relating to proved reserves
$ 4,967
========
F-8
<PAGE>
ACQUISITION PROPERTIES
SUPPLEMENTAL INFORMATION ON GAS RESERVES (UNAUDITED) (CONTINUED)
An analysis of the sources of changes in the standardized measure of discounted
future net cash flows relating to proved reserves on the pricing basis described
above for the Acquisition Properties for the nine months ended September 30,
2000 is shown below:
September 30,
2000
Balance, beginning of period $ -
Increase (decrease) in discounted future net cash flows:
Extension and discoveries 4,967
-------
Balance, end of period $ 4,967
=======
F-9
<PAGE>
Schedule D
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EMPIRE ENERGY CORPORATION
A STOCK CORPORATION
Empire Energy Corporation (the "Corporation"), a corporation organized and
existing under the Utah Revised Business Corporations Act (the "URBCA") hereby
certifies as follows:
1. That the Corporation was incorporated on November 10, 1983 pursuant to the
URBCA.
2. Pursuant to Section 16-10a-1007 of the URBCA, this Amended and Restated
Certificate of Incorporation restates and integrates and further amends the
provisions of the Certificate of Incorporation of the Corporation.
3. This Amended and Restated Certificate of Incorporation has been adopted in
accordance with Section 16-10a-852 of the URBCA and Section 3 of the
Corporation's By-laws.
4. The text of the Certificate of Incorporation is hereby amended and restated
in its entirety as follows:
Part 1
NAME
The name of the corporation is Empire Energy Corporation (the "Corporation").
Part 2
REGISTERED OFFICE AND REGISTERED AGENT
The address of the Corporation's registered office is 455 East 500 South #205,
Salt Lake City, Utah 84111, and the name of its registered agent at that address
is Branden T. Burningham.
<PAGE>
Part 3
PURPOSE
The purpose of this Corporation is to engage in and carry on any lawful business
or trade and exercise all powers granted to a corporation formed under the URBCA
of the State of Utah, including any amendments thereto or successor statute that
may hereinafter be enacted.
Part 4
AUTHORIZED SHARES
The Corporation is authorized to issue two classes of stock to be designated,
respectively, "Class A Common Stock", $0.001 par value and "Class B Redeemable
Voting Common Stock", $0.0001 par value. The total number of shares of Class A
Common Stock that the Corporation is authorized to issue is 50 million shares.
The total number of shares of Class B Redeemable Common Stock that the
Corporation is authorized to issue is 6,000,000 shares.
Part 5
COMMON STOCK
The special rights of Class A Common Stock and the Class B Redeemable Common
Stock or the holders thereof are as follows:
General
5.1 Except as otherwise required by the URBCA or as otherwise provided in this
Amended Certificate of Incorporation, each share of Class A Common Stock and
Class B Redeemable Common Stock shall have identical rights, preferences,
privileges and restrictions, including rights in liquidation. Each provision of
this Part 5 shall be severable and an adverse determination as to any such
provision shall in no way affect the validity of any other provision.
Voting
5.2 The holders of the Class A Common Stock and Class B Redeemable Common Stock
are entitled to one vote for each share held at all meetings of stockholders
(and written actions in lieu of meeting). With respect to all matters upon which
stockholders are entitled to vote or to which stockholders are entitled to give
consent, the holders of the outstanding shares of Class A Common Stock and Class
B Redeemable Common Stock shall have voted together without regard to class.
There shall be no cumulative voting.
Changes in Authorized Number
5.3 The number of authorized shares of Class A Common Stock and Class B
Redeemable Common Stock may be increased or decreased subject to the
Corporation's legal commitments at any time and from time to time to issue them,
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<PAGE>
by the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote.
Dividends
5.4 No dividends shall be paid on the Class B Redeemable Common Stock.
Liquidation
5.5 The Class B Redeemable Common Stock shall not be entitled to receive any
assets of the Corporation upon the dissolution or liquidation of the Corporation
except their par value.
Mandatory Redemption of Class B Redeemable Common Stock
5.6 Upon the issuance of any shares of Class A Common Stock to a holder of Class
B Redeemable Common Stock in connection with the conversion (a "Conversion
Event") by such holder of any Series A Exchangeable Shares, no par value per
share, of Empire Exchangeco Ltd., a corporation existing under the federal laws
of Canada ("Empire Exchangeco") ("Empire Exchangeco Series A Exchangeable
Shares"), such holder's shares of Class B Redeemable Common Stock shall be
automatically redeemed, out of funds legally available therefore, by the
Corporation for par value. The number of shares of Class B Redeemable Common
Stock redeemed shall be equal to that number of shares of Class A Common Stock
issued to the holder upon the Conversion Event. Upon a Conversion Event, the
Class B Redeemable Common Stock held by the stockholder participating in the
Conversion Event shall only represent the right to receive par value for each
Class B Redeemable Common Stock share from the Corporation and all others rights
of the Class B Redeemable Common Stock shall be automatically extinguished.
Further, upon a Conversion Event, the Corporation shall have no obligation to
issue shares of Class A Common Stock to any holder converting Empire Exchangeco
Series A Exchangeable Shares until the holder surrenders (or constructively
surrenders, as the case may be, if the certificate or certificates for such
shares are being held for such holder by Empire Exchangeco, or if Empire
Exchangeco has not yet issued and delivered such certificate or certificates to
the holder) the certificates, duly endorsed, at the office of the Corporation or
of any transfer agent for the equal number shares of Class B Redeemable Common
Stock for redemption by the Corporation or such holder provides the Corporation
with a lost certificate affidavit, in a form acceptable to the Corporation. Such
redemption shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Class B Redeemable
Common Stock to be redeemed. Nothing in this Part 5 shall require the redemption
of a holder's Class B Redeemable Common Stock upon the issuance of Class A
Common Stock to such holder separate from a Conversion Event.
Part 6
TRANSFER OF STOCK PAIRING.
Subject to the restrictions on transfer of stock described in the Corporation's
Bylaws, as amended from time to time, upon surrender to any transfer agent of
the Corporation of a certificate of shares of the Corporation duly endorsed or
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<PAGE>
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Until the limitations on transfer set forth in the Support Agreement (the
"Support Agreement"), dated as of the Effective Date of the Merger transaction
(by and between the Corporation and Commonwealth Energy Corporation), by and
between the Corporation and Empire Exchangeco, which may be amended from time to
time in accordance with the provisions thereof, shall be terminated:
6.1 All shares of Class B Redeemable Common Stock that are paired pursuant to
the Support Agreement with the Empire Exchangeco Series A Exchangeable Shares
shall not be transferable, and shall not be transferred on the stock transfer
books of the Corporation, unless (i) a simultaneous transfer of Empire
Exchangeco Series A Exchangeable Shares is made by the same transferor to the
same transferee for the same number of shares or (ii) arrangements have been
made with Empire Exchangeco for the acquisition by the transferee of a like
number of Empire Exchangeco Series A Exchangeable Shares and such shares are
paired with the Class B Redeemable Common Stock. Any purported transfer of Class
B Redeemable Common Stock in violation of this Section 6 shall be void ab
initio, and the intended transferee shall acquire no rights in such shares of
Class B Redeemable Common Stock.
6.2 Each certificate evidencing ownership of shares of Class B Redeemable Common
Stock of the Corporation that are paired pursuant to the Support Agreement and
issued and not cancelled prior to the effectiveness of the Support Agreement
shall be deemed to evidence a like number of Empire Exchangeco Series A
Exchangeable Shares.
6.3 A legend shall be placed on the face of each certificate evidencing
ownership of shares of Class B Redeemable Common Stock referring to the
restrictions on transfer set forth herein. 6.4 A copy of the Support Agreement
shall be made available to the stockholders upon request, without charge.
Nothing in this Part 6 shall prohibit the redemption of the Class B Redeemable
Common Stock, as provided for by Part 5 hereof, upon the conversion of the
Empire Exchangeco Series A Exchangeable Shares into Class A Common Stock.
Part 7
PERPETUAL EXISTENCE
The Corporation shall have perpetual duration.
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<PAGE>
Part 8
DIRECTORS
The business and affairs of the Corporation shall be managed by or under the
direction of the Board of Directors. The number of Directors shall be fixed by,
or in the manner provided in, the Bylaws of the Corporation. Elections of
Directors need not be by written ballot.
Part 9
AMENDMENTS TO BYLAWS
In furtherance, and not in limitation, of the powers conferred by statute, the
Board of Directors is expressly authorized to make, amend, alter, change, add to
or repeal Bylaws of the Corporation, without any action on the part of the
stockholders. The Bylaws may be amended, altered, changed, added to or repealed
by the stockholders. Any specific provision in the Bylaws regarding amendment
thereof shall be controlling.
Part 10
LIMITATION ON LIABILITY OF DIRECTORS
Director of the Corporation shall not be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
Director; provided, however, that this Part 10 shall not eliminate or limit the
liability of a Director (a) for any breach of the Director's duty of loyalty to
the Corporation or its stockholders; (b) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law; (c) for
the unlawful payment of dividends or unlawful stock repurchases under Section
16-10a-631 of the Utah URBCA; or (d) for any transaction from which the Director
derived an improper personal benefit. This article shall not eliminate or limit
the liability of a Director for any act or omission occurring prior to the
effective date of this Part.
If the URBCA is hereafter amended to authorize any further limitation of the
liability of a Director, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Utah
URBCA, as amended.
Any repeal or modification of the foregoing provisions of this Part 10 by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
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<PAGE>
Part 11
INDEMNIFICATION OF DIRECTORS
The Corporation shall indemnify, to the fullest extent authorized or permitted
by law as now enacted or hereafter amended, any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a Director or Officer of the
Corporation or by reason of the fact that such person, at the request of the
Corporation, is or was serving any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, as a Director or
Officer.
The Corporation shall, to the fullest extent authorized or permitted by law as
now enacted or hereafter amended, pay the expenses (including attorneys' fees)
incurred by persons identified in the preceding paragraph of this Part 11 in
defending such action, suit or proceeding in advance of the final disposition of
such action, suit or proceeding.
The rights conferred on any person pursuant to this Part 11 shall not be
exclusive of any other rights that such person may have or hereafter acquire
under any statutes, bylaws, agreement, vote of stockholders or disinterested
Directors, or otherwise.
The Board of Directors may authorize the purchase and maintenance of insurance
for the purpose of such indemnification or other rights granted pursuant to this
Part 11, against expense, liability or loss, whether or not the Corporation
would have the power to indemnify such persons against such expense, liability
or loss under the URBCA, as now enacted or hereafter amended.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Part 11 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a Director, Officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
Part 12
STOCKHOLDER MEETINGS
Meetings of stockholders may be held within or without the State of Utah, as the
Bylaws may provide. The books of the Corporation may be kept (subject to any
provision contained in the statutes) outside of the State of Utah at such place
or places as may be designated from time to time by the Board of Directors or in
the Bylaws of the Corporation. Elections of directors need not be by written
ballot unless a stockholder demands election by written ballot at the meeting
and before voting begins or unless the Bylaws of the Corporation shall so
provide.
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<PAGE>
The foregoing amendment and restatement of the Certificate of Incorporation has
been duly approved by the Board of Directors of the Corporation in accordance
with the provisions of Sections 16-10a-820 and 16-10a-824 of the URBCA.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by ________________, its
_______________, and attested by ________________, its Secretary, this __ day of
_____, 2001.
EMPIRE ENERGY CORPORATION
-------------------------------
By:
Its: Chief Executive Officer
ATTEST:
-------------------------------
By:
President
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<PAGE>
Dissent Rights Under Utah Revised Business Corporation Act
16-10a-1301. Definitions. For purposes of Part 13:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 16-10a-1302 and who exercises that right when and
in the manner required by Sections 16-10a-1320 through 16-10a-1328.
(4) "Fair value" with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the statutory rate set forth in Section
15-1-1, compounded annually.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent the beneficial owner
is recognized by the corporation as the shareholder as provided in Section
16-10a-723.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
Enacted by Chapter 277, 1992 General Session
16-10a-1303. Dissent by nominees and beneficial owners. (1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in his
name only if the shareholder dissents with respect to all shares beneficially
owned by any one person and causes the corporation to receive written notice
which states the dissent and the name and address of each person on whose behalf
dissenters' rights are being asserted. The rights of a partial dissenter under
this subsection are determined as if the shares as to which the shareholder
dissents and the other shares held of record by him were registered in the names
of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) the beneficial shareholder causes the corporation to receive the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) the beneficial shareholder dissents with respect to all shares of which
he is the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
beneficial shareholder must certify to the corporation that both he and the
record shareholders of all shares owned beneficially by him have asserted, or
will timely assert, dissenters' rights as to all the shares unlimited on the
ability to exercise dissenters' rights. The certification requirement must be
stated in the dissenters' notice given pursuant to Section 16-10a-1322.
Enacted by Chapter 277, 1992 General Session
<PAGE>
16-10a-1320. Notice of dissenters' rights. (1) If a proposed corporate action
creating dissenters' rights under Section 16-10a-1302 is submitted to a vote at
a shareholders' meeting, the meeting notice must be sent to all shareholders of
the corporation as of the applicable record date, whether or not they are
entitled to vote at the meeting. The notice shall state that shareholders are or
may be entitled to assert dissenters' rights under this part. The notice must be
accompanied by a copy of this part and the materials, if any, that under this
chapter are required to be given the shareholders entitled to vote on the
proposed action at the meeting. Failure to give notice as required by this
subsection does not affect any action taken at the shareholders' meeting for
which the notice was to have been given.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders pursuant to
Section 16-10a-704, any written or oral solicitation of a shareholder to execute
a written consent to the action contemplated by Section 16-10a-704 must be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this part, by a copy of this
part, and by the materials, if any, that under this chapter would have been
required to be given to shareholders entitled to vote on the proposed action if
the proposed action were submitted to a vote at a shareholders' meeting. Failure
to give written notice as provided by this subsection does not affect any action
taken pursuant to Section 16-10a-704 for which the notice was to have been
given.
Enacted by Chapter 277, 1992 General Session
16-10a-1321. Demand for payment -- Eligibility and notice of intent. (1) If a
proposed corporate action creating dissenters' rights under Section 16-10a-1302
is submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights:
(a) must cause the corporation to receive, before the vote is taken,
written notice of his intent to demand payment for shares if the proposed action
is effectuated; and
(b) may not vote any of his shares in favor of the proposed action.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders pursuant to
Section 16-10a-704, a shareholder who wishes to assert dissenters' rights may
not execute a writing consenting to the proposed corporate action.
(3) In order to be entitled to payment for shares under this part, unless
otherwise provided in the articles of incorporation, bylaws, or a resolution
adopted by the board of directors, a shareholder must have been a shareholder
with respect to the shares for which payment is demanded as of the date the
proposed corporate action creating dissenters' rights under Section 16-10a-1302
is approved by the shareholders, if shareholder approval is required, or as of
the effective date of the corporate action if the corporate action is authorized
other than by a vote of shareholders.
(4) A shareholder who does not satisfy the requirements of Subsections (1)
through (3) is not entitled to payment for shares under this part.
Enacted by Chapter 277, 1992 General Session
<PAGE>
16-10a-1322. Dissenters' notice. (1) If proposed corporate action creating
dissenters' rights under Section 16-10a-1302 is authorized, the corporation
shall give a written dissenters' notice to all shareholders who are entitled to
demand payment for their shares under this part.
(2) The dissenters' notice required by Subsection (1) must be sent no later
than ten days after the effective date of the corporate action creating
dissenters' rights under Section 16-10a-1302, and shall:
(a) state that the corporate action was authorized and the effective date
or proposed effective date of the corporate action;
(b) state an address at which the corporation will receive payment demands
and an address at which certificates for certificated shares must be deposited;
(c) inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(d) supply a form for demanding payment, which form requests a dissenter to
state an address to which payment is to be made;
(e) set a date by which the corporation must receive the payment demand and
by which certificates for certificated shares must be deposited at the address
indicated in the dissenters' notice, which dates may not be fewer than 30 nor
more than 70 days after the date the dissenters' notice required by Subsection
(1) is given;
(f) state the requirement contemplated by Subsection 16-10a-1303(3), if the
requirement is imposed; and (g) be accompanied by a copy of this part.
Enacted by Chapter 277, 1992 General Session
16-10a-1323. Procedure to demand payment. (1) A shareholder who is given a
dissenters' notice described in Section 16-10a-1322, who meets the requirements
of Section 16-10a-1321, and wishes to assert dissenters' rights must, in
accordance with the terms of the dissenters' notice:
(a) cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in Subsection 16-10a-1322(2)(d), duly
completed, or may be stated in another writing;
(b) deposit certificates for his certificated shares in accordance with the
terms of the dissenters' notice; and
(c) if required by the corporation in the dissenters' notice described in
Section 16-10a-1322, as contemplated by Section 16-10a-1327, certify in writing,
in or with the payment demand, whether or not he or the person on whose behalf
he asserts dissenters' rights acquired beneficial ownership of the shares before
the date of the first announcement to news media or to shareholders of the terms
of the proposed corporate action creating dissenters' rights under Section
16-10a-1302.
(2) A shareholder who demands payment in accordance with Subsection (1)
retains all rights of a shareholder except the right to transfer the shares
until the effective date of the proposed corporate action giving rise to the
exercise of dissenters' rights and has only the right to receive payment for the
shares after the effective date of the corporate action.
(3) A shareholder who does not demand payment and deposit share
certificates as required, by the date or dates set in the dissenters' notice, is
not entitled to payment for shares under this part.
Enacted by Chapter 277, 1992 General Session
<PAGE>
A DETERMINATION OF
THE FAIRNESS OF THE PROPOSED ISSUANCE
OF SHARES OF
EMPIRE ENERGY CORPORATION
FOR ALL OF THE SHARES OF
COMMONWEALTH ENERGY CORP.
DECEMBER 2000
by:
ROSS GLANVILLE & ASSOCIATES LTD.
7513 Pandora Drive, Burnaby, British Columbia, Canada
Telephone: (604) 291-6731
Telephone/Fax: (604) 681-5721
<PAGE>
EXECUTIVE SUMMARY
Ross Glanville & Associates Ltd. ("Glanville") has been retained by the Board of
Directors of Commonwealth Energy Corporation ("Commonwealth") to provide a
professional opinion on the fairness to the shareholders of Commonwealth of the
proposed issuance of approximately 5.5 million common shares of Empire Energy
Corporation ("Empire") in exchange for all of the issued and outstanding shares
of Commonwealth. This report assumes the eventual conversion of Exchangeable
Shares for Empire Common Shares. In order to determine the fairness to the
shareholders of Commonwealth, Glanville has reviewed the existing operations and
business plans of Commonwealth and Empire, reviewed engineering reports on
several of the properties, analysed the existing financial positions of each
company, and considered the share trading histories of both Commonwealth and
Empire.
Commonwealth is a Canadian public company trading on the Canadian Venture
Exchange ("CDNX"), with its corporate office located in Surrey, B.C. Assuming
completion of the presently-underway private placement, the issued and
outstanding shares will total 34,578,544, and the total number of options plus
warrants would be 5,903,116. The recent trading prices have been about Cdn$0.20
per share. The Company is primarily engaged in the acquisition and exploration
of petroleum and natural gas properties in the United States, although it does
have some production in Alberta, Canada. Brief summaries of each of
Commonwealth's major properties are set out in this report.
Empire is engaged in oil and natural gas exploration, development, and
production operations. The company is based in Kansas City. Empire is a public
company that trades on the NASD OTC bulletin board. Recent trading has generally
been in the range of US$1.00 to US$1.50 per share. Currently, there are
13,712,062 Empire shares issued and outstanding. The company's operations
primarily involve oil and gas exploration, development, and production in the
Cumberland Plateau Region of north-central Tennessee (Overton County), with an
expanding effort towards international exploration.
Empire has entered into joint venture agreements with two companies: Pryor Oil
Company and Industria Oklahoma-Nigaragua S.A. In addition, in November 2000,
<PAGE>
3
Empire announced that it had acquired a 43% working interest in a natural gas
field in Leon County, Texas (this is in the Bedsole Unit in which Commonwealth
has a 50% interest) subject to the issuance of just over 1.7 million Empire
treasury shares. The major assets of Empire are summarized in this report.
The major terms and conditions of the proposed agreement between Commonwealth
and Empire are set out below:
o the exchange of shares at closing will be six shares of Commonwealth
for each one Empire Share;
o the actual share price of Empire will not be less than US$1.20 for the
5 trading days prior to closing;
o Empire will have secured the conditional approval the CDNX or AMEX for
the listing of its shares;
o Empire will have working capital of not less than US$100,000;
o hydrocarbon production of Empire from its existing wells will have
averaged not less than 150 barrels per day for the 30 days prior to
closing.
In order to arrive at our assessment of the fairness of the terms of the
proposed transaction, from a financial point-of-view, we have reviewed,
considered, and/or analysed, among other things, the following:
o the business plans of each of Commonwealth and Empire;
o the share trading histories of each company;
o the market capitalizations of each of Commonwealth and Empire;
o the working capital positions of each company;
o the potential of the properties of each company;
o the present financial markets;
o the condition that the closing price of Empire be not less than
US$1.20 for the five days prior to closing. At this price level (which
is equivalent to Canadian $l.83 per share) and the recent trading
<PAGE>
4
price of Commonwealth of about $0.20 per share, the indicated fair
exchange ratio would be higher than the proposed 6:1 exchange ratio;
o the relative low and high prices of Empire and Commonwealth over the
past year. Empire's high and low prices were US$6.125 and U.S. $0.813,
respectively, versus Commonwealth's high and low prices of Cdn$0.66
and Cdn$0.17, respectively. After converting to the same dollars, the
relative ratios would have been about 14:1 and 7:1, respectively, or
higher than the proposed 6:1 exchange ratio;
o the existing equity markets for junior oil and gas companies.
Based on the considerations as set out in this report, Glanville is of the
opinion that the proposed merger transaction is fair to the shareholders (and
holders of options and warrants) of Commonwealth. It is Glanville's opinion that
the existing shareholders of Commonwealth would hold positions in the combined
entity that would have a financial value not less than that of the existing
positions. However, Glanville expresses no opinion as to the expected trading
price of the shares of the combined entity.
<PAGE>
5
INTRODUCTION AND TERMS OF REFERENCE
TERMS OF ENGAGEMENT
Ross Glanville & Associates Ltd. ("Glanville") has been retained by the Board of
Directors of Commonwealth to determine the fairness of the proposed issuance of
shares in of Empire in exchange for all of the shares of Commonwealth. Under the
terms of this engagement, Glanville will be paid a fee and will be reimbursed
for his out-of-pocket expenses. The payment of the fee in connection with the
engagement is not dependent upon a determination that the transaction is fair.
Glanville does not have a financial interest (nor does he expect to have any
future interest), directly or indirectly, in Empire or Commonwealth.
CREDENTIALS OF GLANVILLE
Ross Glanville & Associates Ltd. is a company specializing in the preparation of
fairness opinions and valuations of companies and resource properties. The
President, Ross Glanville (B.A.Sc., P.Eng., M.B.A.) has had over 30 years of
experience in exploration, mining, finance, technology, marketing, and
management, with senior executive positions in major and junior mining
companies. He has valued hundreds of companies and mineral properties in many
parts of Canada, the U.S.A., Australia and Mexico, as well as several dozen in
other areas of the world including Europe, Asia, South America, and Africa. He
has formed public companies (listed on TSE/NASDAQ/CDNX) and has been on the
Board of Directors of three companies with producing mines, two with new
technologies, and two with oil and gas cash flow. Glanville has also acted many
times as expert witness in court cases and assessment appeal board hearings in
both Canada and the United States, and for regulatory authorities. He has
written several articles, and given many presentations, related to the valuation
of companies and mineral properties. Some of these articles were published by
the U.S. Society of Mining Engineers, by the United Nations, and in various
Canadian magazines. Glanville has provided a large number of fairness opinions
for mergers, amalgamations, and acquisitions of public and private companies.
These assignments have been undertaken for mining companies, technology
companies, oil and gas companies, investment dealers, regulatory authorities,
governments, banks, legal firms, and accounting groups, among others.
<PAGE>
6
SCOPE OF REVIEW
In order to carry out the assignment, Glanville reviewed the following:
o Memorandum of Agreement, Dated December, 2000, between Empire and
Commonwealth;
o Form 10-QSB, Quarterly Report (to September 30, 2000) of Empire;
o Quarterly Report (to September 30, 2000) of Commonwealth;
o Form 10-KSB, Annual Report (for the year ended December 31, 1999), for
Empire;
o Audited Consolidated Financial Statements of Commonwealth for the Year
to December 31, 1999;
o Summary Calculation of Net Asset Value of Commonwealth, November 2000;
o Business Plan & Corporate Information of Empire, November 2000;
o Goal and Mission Statement of Commonwealth;
o Empire's Share of Cash Flow and Production (for 1999 and 2000) for
Overton County, Tennessee;
o Appraisal Report on Reserves and Revenue from certain Properties Owned
by 638260 Alberta Inc., May 8, 2000, by P.M. Matsalla, P.Eng.;
o Appraisal of Amerada Hess T-Bar-X Bedsole #1, Leon County, Texas,
April 1, 2000, by William M. Cobb & Associates, Inc.;
o Warren/Thurmond #1, Camp Colorado Prospect, Coleman County, Texas,
March 10, 2000, by Robert L. Hull;
o Warren/Thurmond #2, Camp Colorado Prospect, Coleman County, Texas,
March 5, 2000, by Robert L. Hull;
<PAGE>
7
o Channel Sand Prospects of the Fall River (Dakota) Formation, Weston
County, Wyoming, January 1999, by D.F. Cardinal, J. Trotler, and T.
Mill, Casper, Wyoming;
o Evaluation Summary, Certain Producing Gas Wells in Parker County,
Texas, January 1, 1999, by George W. Todd, Petroleum Engineer;
o Appraisal Report, Petroleum Reserves Owned by Blue Mountain Resources
Inc., January 13, 1997, by E.P. Webb, P.Eng;
o Share trading histories of Commonwealth and Empire;
o News Releases of Commonwealth and Empire; and
o Information from the Commonwealth and Empire websites.
In addition to the foregoing, Glanville:
o had discussions with legal counsel regarding the proposed transaction;
o discussed the financial statements with the auditors of the companies;
o had discussions with officers and directors of the companies;
o visited the Commonwealth offices in Surrey, B.C.;
o reviewed and analysed such other information as Glanville deemed
appropriate
o read corporate profiles of each company.
KEY ASSUMPTIONS AND LIMITATIONS
In providing our Fairness Opinion, we have assumed and relied upon the accuracy
and completeness of all financial and other information furnished to us by
Empire and Commonwealth and their representatives. Glanville has not undertaken
any independent verification of such information (although data was reviewed to
determine its "reasonableness"), nor has he carried out any physical inspections
of the properties of either company. However, Glanville has no reason to believe
that the information provided to him is not accurate or complete. Glanville has
not been denied access to any information that he requested from the management
of Commonwealth and Empire.
<PAGE>
8
Glanville reserves the right to amend or withdraw his opinion in certain events,
including the event that there occurs a material change in any of the facts or
representations upon which it has relied or in the event that Glanville
reasonably concludes that the information provided or any representation it
relied upon contains an untrue statement of material fact or omits to state a
material fact that, in its reasonable valuation opinion, would make the opinion
untrue or inaccurate in any material respect.
AGREEMENT BETWEEN COMMONWEALTH AND EMPIRE
According to a December 12, 2000 merger agreement (the "Agreement") between
Empire and Commonwealth, Empire proposes to acquire 100% of the shares of
Commonwealth pursuant to a six for one share-for-share acquisition transaction.
The major terms and conditions of the proposed Agreement are set out below.
o the exchange of shares at closing will be six (6) shares of
Commonwealth for each one (1) Empire Share;
o Commonwealth will have the right to maintain at least 2 of at most 7
board seats of the Board of Directors of Empire for at least 5 years;
o three executives of Commonwealth will continue to be employed by
Empire, and will participate in 5 year Empire share options with an
exercise price of US$3.00 to the extent of 10% of the number of shares
actually issued by Empire at closing;
o the actual share price of Empire will not be less than US$1.20 for the
5 trading days prior to closing;
o Empire will have secured the conditional approval the CDNX or AMEX for
the listing of its shares;
o Empire will have working capital of not less than US$100,000;
o hydrocarbon production of Empire from its existing wells will have
averaged not less than 150 barrels per day for the 30 days prior to
closing; and
<PAGE>
9
o a minimum of two-thirds of the Commonwealth shareholders (present in
person or by proxy at the meeting to vote on the proposed transaction)
must approve the transaction.
There are various due diligence, regulatory, financial, and shareholder
requirements that must be satisfied prior to the closure of the proposed
transaction.
COMMONWEALTH ENERGY CORP.
OVERVIEW
Commonwealth is a Canadian public company trading on the Canadian Venture
Exchange ("CDNX"), with its corporate office located in Surrey, B.C. With the
completion of the "presently-underway" private placement, the issued and
outstanding shares will total 34,578,544, and the total number of options plus
warrants would be 5,903,116. The recent trading prices have been about Cdn$0.20
per share. The Company is primarily engaged in the acquisition and exploration
of petroleum and natural gas properties in the United States, although it does
have some production in Alberta, Canada. Brief summaries of each of
Commonwealth's major properties are set out in the following sections.
BEDSOLE UNIT (LEON COUNTY, TEXAS)
Commonwealth is the operation of, and holds a 50% working interest in, the
700-acre Bedsole Unit in Leon County, Texas. A well (the Amerada Hess
Corporation T-Bar-X Bedsole #1) was drilled in March 1998 to a total depth of
16,132 fee, logged to 14,242 feet, and cased with 7-inch casing to 14,242 feet,
but never completed. William M. Cobb & Associates, Inc. ("Cobb"), worldwide
petroleum consultants, completed an appraisal of the well as of April 1, 2000.
These consultants determined that the well had potential pay zones in the
Bossier (14,140 feet), Cotton Valley (12,738 feet) and Travis Peak (9,370 feet)
formations. Since a major unknown in the analysis was the drainage area that
could reasonably be achieved by the well, Cobb calculated net probable reserves
under three different drainage scenarios. Based on the middle case (120 acre
<PAGE>
10
drainage scenario), a natural gas price of US$2.00 per mcf, and an oil price of
US$20.00 per barrel, Cobb calculated discounted future net cash flow (prior to
income tax) as follows (in thousands of U.S. dollars):
================================================================================
10% Discount 15% Discount
--------------------------------------------------------------------------------
Bossier.............. 2,802 N/A1
Cotton Valley........ 1,872 N/A
Travis Peak.......... 213 N/A
--------------------------------------------------------------------------------
Total................ $4,887 $3,728
================================================================================
The 3-D Seismic as well as Electro-Seise Inc.'s airborne gravity seismic
technology both indicate that there are two Pinnacle Reef potential drilling
targets contained within the 700-acre Bedsole Unit. It should be noted that the
Bedsole Unit lies on trend within 1.5 million of two Reef discoveries (which are
both significant current natural gas producers).
Since the Cobb report, the following events have occurred:
o The Bossier Formation was completed and natural gas was discovered in
June 2000. The FRAC, which was completed in July 2000, opened up a
salt-water zone which inhabited the capability of the gas to be
produced on a commercial basis from this zone.
o In September 2000, Commonwealth completed the perforation of 36 feet
within the bottom section of the Cotton Valley Formation, with the
well flowing back natural gas. The completion attempt in the Cotton
Valley consists of three perforation phases, with the 36 feet already
perforated being Phase I.
o As of November 2000, a service rig is continuing the completion
operations, including testing of perforation Phase I.
o Natural gas prices have increased dramatically from the US$2.00 per
mcf level utilized by Cobb.
----------------
1 Not available
<PAGE>
11
o Empire acquired a 43% interest in Bedsole Unit by issuing
approximately 1,700,000 of its treasury shares.
CAMP COLORADO (COLEMAN COUNTY, TEXAS)
Commonwealth holds a 39% interest in this 2,600 acre prospect in Coleman County,
Texas. The Warren/Thurmond #1 was successfully drilled in July 1999, while the
direct offset well (Warren/Thurmond #2) was completed in early February 2000. In
early March 2000, Robert H. Hull of Tektonik Energy Corp. completed economic
runs for each of the wells, utilizing prices of US$2.25/mcf for gas and
$20.00/barrel for oil (both prices escalated at 3% per year). The resulting
discounted present values of projected future cash flows are summarized below in
U.S. dollars (Commonwealth's interests would be 39% of the following):
==============================================================================
10% Discount 15% Discount
------------------------------------------------------------------------------
Warren/Thurmond #1........................... $443,000 $342,000
Warren/Thurmond #2........................... $410,000 $344,000
==============================================================================
The gross daily production from Warren/Thurmond #1 Well ranges from 100 to 200
mcf of natural gas per day, while gross daily production from Warren/Thurmond #2
Well ranges from 100 to 200 mcf of natural gas per day plus 3 to 5 barrels of
oil per day.
The two successful wells drilled to date have shown that this prospect has
multi-zone production potential, and the prospect appears to have sufficient
acreage to support the drilling of an additional 10 to 15 wells.
OLD WORLD PROSPECT (PARKER COUNTY, TEXAS)
Commonwealth holds a 50% interest in gas reserves located under 3,000 acres of
land in Parker County, Texas. There are presently six key wells producing from
various sands and conglomerate formations on the leases.
In April 1999, Thor D. Humphrey Oil Properties, Inc., Petroleum Engineering
Consultants, prepared an Evaluation Summary (as of January 1, 1999) of gas
reserves, with the results (for 100%) as follows:
<PAGE>
12
Proved Developed Reserves (6 wells)................... 844,980 mcf
Net Reserves.......................................... 675,984 mcf
Present Values of Projected Future Cash Flows2:
10% discount rate................................ $553,000
15% discount rate................................ $475,000
Probable Non-Producing................................ 716,361 mcf
Possible Undeveloped Gas Reserves3.................... 13,602,000 mcf
TYLER LEASE (WASHINGTON COUNTY, OKLAHOMA)
Commonwealth owns a 100% interest (via its wholly-owned subsidiary, Blue
Mountain Resources Inc.) in the Tyler and Johnston leases in Washington County,
Oklahoma. Current gross daily production is approximately 15 barrels of oil per
day from five wells (there are 29 existing wells on the property).
Citadel Engineering Ltd. appraised the petroleum reserves of Blue Mountain
Resources Inc. at January 13, 1977, as summarized below:
===============================================================================
Proved Producing Oil (barrels)............................... 166,000 net
Proved Developed Non-Producing (barrels)..................... 251,000 net
Proved Undeveloped........................................... 98,000 net
-----------
Total Proved................................................. 515,000 net
Probable Additional (reduced by 25%) 221,000 net
-----------
Grant Total.................................................. 736,000 net
===============================================================================
===============================================================================
Discounted Present Value4: Total Proved Grand Total
-------------------------------------------------------------------------------
At 10% discount rate...................... $4,275,000 $6,681,000
At 15% discount rate...................... $3,175,000 $5,009,000
===============================================================================
-------------
1 at a gas price of US$2.00mcf and oil at US$15.00 per barrel
2 that may be recovered through additional drilling or recompletions
3 at an oil price of 425,92/barrel
<PAGE>
13
Based on actual production compared to projections in the Citadel report, the
appraised values today would be reduced to only a fraction of the foregoing
numbers.
ALBERTA PROPERTIES
In July of 2000, Commonwealth received final approval for its December 1999
acquisition (consideration of 1,375,000 shares of Commonwealth at a deemed price
of $0.20 per share) of 638260 Alberta Inc. 638260 Alberta Inc. owns small
Working Interests and Royalty Interests in a group of 740 proven producing oil
and natural gas wells in addition to several plant facilities and gas gathering
facilities throughout Alberta, Canada. The majority of the wells are located in
the Vermilion area of East Central Alberta. Ninety percent (90%) of the 740
wells are designated as natural gas wells. The set of oil and gas assets are
fully managed by an intermediate size oil and gas operator, Signalta Resources
Ltd.
Matsalla Consulting (1981) ltd. (P.M. Matsella, P.Eng.) prepared an appraisal
report on the interests of 638260 Alberta as at January 1, 2000. That report
estimated present values of Cdn$304,000 and Cdn$262,000 at discount rates of 10%
and 15%, respectively. Prices of natural gas were assumed to average about
Cdn$2.75 for the first five years, and to increase at about 2% per year from a
price level of Cdn$2.80 per mcf in 2004. Prices of oil were estimated to average
about Cdn$30.00 per barrel for the first 10 years, and then increase gradually
to Cdn$40 in the 20th year.
WYOMING PROPERTIES
Commonwealth owns various percentage interests (generally 100% subject to
royalties) in seven oil and gas leases in Western County, Wyoming. These are
referred to as the Channel Sand Prospects of the Fall River (Dakota) Formation.
One of the prospects is called the Madren Draw Prospect.
The Madren Draw Prospect covers 3,400 acres and is located in Weston County,
Wyoming. It lies within the famous oil and gas producing region known as the
Powder River Basin in northeastern Wyoming. Two extensive geologic studies have
been completed on the Prospect, both of which conclude that the Madren Draw may
have geological similarities to a discovery in the Fall River (Dakota) Formation
in 1958 known as the Coyote Creek Oil & Gas Field. To date the Coyote Creek
Field has produced over 30 million barrels of oil and 25 billion cubic feet of
gas. The Coyote Creek Field lies 7 miles northwest of the Madren Draw Prospect.
<PAGE>
14
Commonwealth completed the drilling of the Driscoll #22-19 well on the Madren
Prospect in April 2000. It was drilled to a depth of 5,528 feet.
OTHER ASSETS/LIABILITIES
As of September 30, 1999, Commonwealth had a working capital deficit of
Cdn$379,000. However, with the closing of the current private placement, the
working capital should be over Cdn$50,000.
As at December 31, 1999, Commonwealth had potential income tax benefits of
losses of $1,763,000 incurred by the Company and its subsidiaries. These losses,
which could be available to reduce future income for income tax purposes, will
expire over the period 2000 to 2019 if not utilized before that time.
SHARE STRUCTURE/TRADING PRICES
The Commonwealth share structure is summarized below:
===============================================================================
Issued and Outstanding...................................... 32,578,544
Current Private Placement (at $0.25)5....................... 2,000,000
Stock Options @ $0.20/share................................. 600,000
Stock Options @ $0.25/share................................. 600,000
Stock Options @ $0.30/share................................. 1,678,504
Stock Options @ $0.45/share................................. 50,000
Warrants @ $0.30/share6..................................... 2,974,612
-------------------------------------------------------------------------------
Fully Diluted Shares........................................ 40,481,660
===============================================================================
--------
1 This private placement has not closed yet.
2 This includes 2,000,000 warrants based on the assumption that the private
placement closes.
<PAGE>
15
If all of the options and warrants were to be exercised, the Company would
receive additional cash of $1,688,435.
The closing prices of the shares of Commonwealth during November 2000 have
ranged from $0.18 to $0.25 per share, and from $0.21 to $0.33 per share during
October 2000. The high and low prices for the year to the end of November 2000
were $0.66 and $0.17, respectively (see attached price chart).
EMPIRE ENERGY CORPORATION
OVERVIEW
Empire is engaged in oil and natural gas exploration, development, and
production operations. The company is based in Kansas City. Empire is a public
company that trades on the NASD bulletin board exchange. Recent trading has
generally been in the range of US$1.00 to US$1.50 per share. Currently, there
are 13,712,062 Empire shares issued and outstanding. The company's operations
primarily involve oil and gas exploration, development and production in the
Cumberland Plateau Region of north-central Tennessee (Overton County), with an
expanding effort towards international exploration.
Empire has entered into joint venture agreements with two companies: Pryor Oil
Company and Industria Oklahoma-Nigaragua S.A. In addition, in November 2000,
Empire announced that it had acquired a 43% working interest in a natural gas
field in Leon County, Texas (this is in the Bedsole Unit in which Commonwealth
has a 50% interest). The major assets of Empire are summarized in the following
sections of this report.
OVERTON COUNTY, TENNESSEE
Pryor Oil Company conducts exploration and production operations in the
Cumberland Plateau Region of north-central Tennessee, in which Empire has a 60%
working interest. The partnership (Empire and Pryor) has had oil sales from
three producing leases. These include the first exploratory/discovery Endicott
lease, which produced oil from the shallow depth of 1,200 feet, the offset
<PAGE>
16
Cooper lease, which is currently producing oil from approximately 850 feet and
from a new field discovered in late June 2000 on the Campbell-Bilbrey lease,
which produces from approximately 850 feet. The total field production to date
has fluctuated between 100 and 200 BOPD of light sweet crude, depending on the
gas pressure on the reservoir.
According to the August 30, 2000 news release of Empire, total production in
July was 6,500 barrels of oil. Furthermore, Empire is in the process of bringing
another well, the Endicott No. 2, into production. Evaluation of the cuttings
from the well provided sufficient data to justify an acid treatment of the
Murfeesboro formation at a depth of approximately 1,200 feet. Following the acid
treatment, the formation produced oil at an initial rate of 100 barrels of oil
per day (BOPD). The well is currently being put on pump and is expected to be
brought into production within the next year.
Additional land has been leased, evaluated, and a drilling program is planned.
The Cumberland Plateau Region of north-central Tennessee is favourably
characterized by its unique shallow oil reserves (less than 2,000 feet) and
light sweet crude (41 (Degree) API).
During the nine months ended September 30, 2000, Empire generated $414,826 in
revenue from the sale of oil from its producing oil wells in Tennessee and
incurred $8,401 in lease operating expense related to these wells. During the
quarter ended September 30, 2000, the company generated $190,376 in revenue from
the sale of oil from its producing oil wells in Tennessee and incurred $1,942 in
lease operating expense related to these wells.
INDUSTRIA OKLAHOMA-NICARAGUA S.A.
Empire owns a 50.5% interest in Industrial Oklahoma-Nicaragua S.A., a firm that
has been official domiciled in Nicaragua and is now qualified to pursue a
hydrocarbon exploration contract in Nicaragua. In a Board of directors meeting
of the Energy Ministry of Nicaragua (Institute de Nicaraguan Energia - INE), the
application for qualification was formally signed by INE declaring Industria
Oklahoma-Nicaragua S.A. to be technically, financially and legally qualified to
<PAGE>
17
apply for a contract to explore for oil and gas both onshore and offshore.
Empire and Industria Oklahoma-Nicaragua S.A. plan to proceed immediately, once
the area is officially opened, to comply with government requirements to attempt
to obtain a concession agreement (contract) and begin exploration.
As profiled in the Oil and Gas Journal in February 2000, Nicaragua is considered
to be one of the few remaining areas yet to be explored for oil and gas. Due to
various circumstances in Nicaragua over the last 20 years, the opportunity for
exploration has not been present.
The opportunity for a large exploration contract is part of Empire's strategy to
build its asset base and grow in its core areas of oil and gas exploration and
production. Harold Witcher, President of Industria Oklahoma-Nicaragua S.A., has
worked on this prospect, gathering geological data for nearly 30 years, since
the early 1970's and feels that the opportunity exists for very significant oil
and gas reserves. His reconnaissance strongly suggests numerous anticlines, and
indications exist to support ideal source, reservoir rock and thermal gradients.
In summary, Industria Oklahoma-Nicaragua S.A. is a company that has been
technically, legally and financially qualified by the government of Nicaragua to
conduct oil exploration under a new law (circa 1998) in that country. Industria
Oklahoma-Nicaragua S.A., along with Empire, is actively pursuing the execution
of a contract with the government of Nicaragua for a contract (oil concession)
allowing the firms the rights to explore on 750,000 acres of native land in the
Central American nation. Data suggests that this land mass may be host to in
excess of 1 billion barrel reserves.
LEON COUNTY, TEXAS
Empire has recently (November 2000) acquired a 43% working interest in the
Bedsole Unit base in Leon County, Texas. The lease consists of approximately 704
acres and currently has one well, the T-Bar-X Bedsole #1, drilled by Amerada
Hess to 16,312 feet. For additional details, see the description in the
Commonwealth section of this report (Commonwealth is the operator and owns a 50%
working interest).
<PAGE>
18
OMEGA INTERNATIONAL, INC.
On February 8, 2000, Empire acquired all the outstanding common stock of Omega
International, Inc. ("Omega") for 560,000 shares of Empire's common stock. Omega
is focused on business opportunities in Africa, primarily the purchase and
resale of minerals in Ghana.
TALISMAN MARKETING INC.
On April 12, 2000, Empire acquired substantially all the assets of Talisman
Marketing Inc., a marketing company, for 562,150 shares of Empire' common stock.
Empire will employ the newly acquired assets to facilitate the development of
its marketing arm through two planned wholly-owned subsidiaries.
OTHER ASSETS/LIABILITIES
The working capital of Empire as at September 30, 2000 was U.S. $223,000. The
company also had a net operating loss carry forward available for Federal income
tax purposes of approximately US$1,978,000 as at December 31, 1999. However,
because of tax rules relating to changes in corporate ownership, the utilization
by the company of these benefit carryforwards in reducing tax liability may be
restricted. The amounts of operating loss carryforwards expire in varying
amounts through 2014.
SHARE STRUCTURE/TRADING PRICES
As at October 31, 2000 there were 13,712,062 issued and outstanding shares of
Empire (of which Empire owns 750,000 shares). Since then, an additional
1,714,000 shares have been, or will be, issued to complete Empire's acquisition
of 42.85% of the Bedsole Unit in Leon County, Texas, resulting in a total of
about 15.4 million shares. In addition, there are options as follows:
<PAGE>
19
================================================================================
Exercisable @ US$0.60/share.................................... 750,000
Exercisable @ US$1.00/share.................................... 738,500
Exercisable @ US$2.50/share.................................... 100,000
--------------------------------------------------------------------------------
Total.......................................................... 1,588,560
================================================================================
If all of the options exercisable at $1.00 and $0.60 per share, respectively,
were to be exercised, the company would receive an additional US$1,188,500.
The closing prices of Empire over the three month period to the end of November
2000 have ranged from US$0.875 to US$1.72 per share, with the close on the last
trading day in November at US$1.50 per share. See attached page for price chart
of Empire.
ADVANTAGES OF PROPOSED COMBINATION
There are a number of advantages of the proposed combination of Empire and
Commonwealth, some of which are summarized below:
o there will be additional opportunities to effectively increase
revenues via increased production from different geographical areas;
o shareholders of Empire will have the opportunity to participate in
what could be a major new oil and gas play (via Empire's 50.5%
interest in Industria Oklahoma-Nicaragua S.A.);
o the combined company may qualify for a listing on the American Stock
Exchange or NASDAQ Small Cap;
o there should be savings resulting from the fact that there will only
be one listed company;
o the combined entity should be in a better position to raise additional
financing.
<PAGE>
20
DEFINITION OF FAIRNESS
For the purpose of this Fairness Opinion, we consider the proposed transaction
to be fair, from a financial point-of-view to the shareholders of Commonwealth,
provided that it is our assessment that, on an overall basis, the financial
value of the rights and interests attributable to such shareholders after giving
effect to the proposed transaction fully reflects, and is not less than, the
financial value of their rights and interests as shareholders prior to the
proposed transactions.
FAIRNESS CONSIDERATIONS
In order to arrive at our assessment of the fairness of the terms of the
proposed transaction, from a financial point-of-view, we have reviewed,
considered, and/or analysed, among other things, the following:
o the business plans of each of Commonwealth and Empire;
o the working capital positions of each company;
o the share trading histories of each company;
o the market capitalizations of each of Commonwealth and Empire;
o the experience and qualifications of the management teams of each
company;
o the potential of the properties of each company;
o the present financial markets;
o the existing equity markets for junior oil and gas companies;
o the difficulty that Commonwealth might have in raising additional
funds, and the likely significant share dilution in this difficult
financial market for junior resource companies;
o the recent private placement by Commonwealth of Cdn$0.25 per share
(with warrants @ $0.30 per share);
<PAGE>
21
o the condition that the closing price of Empire be not less than
US$1.20 for the five days prior to closing. At this price level (which
is equivalent to Canadian $l.83 per share) and the recent trading
price of Commonwealth of about $0.20 per share, the indicated fair
exchange ratio would be about 9:1, which is higher than the proposed
6:1 exchange ratio;
o the relative low and high prices of Empire and Commonwealth over the
past years. Empire's high and low prices were US$6.125 and U.S.
$0.813, respectively, versus Commonwealth's high and low prices of
Cdn$0.66 and Cdn$0.17, respectively. After converting to the same
dollars, the relative ratios would have been about 14:1 and 7:1,
respectively, or higher than the proposed 6:1 exchange ratio;
o the significant potential in Nicaragua, balanced against the high risk
at this stage;
o the expected percentage interest of Commonwealth in the combined
company upon completion of the proposed transaction;
o the recent trading prices of the shares of Empire and Commonwealth;
o the warrants and options of each company (and the respective exercise
prices);
o the losses for income tax purposes that may be applied to reduce
future year's taxable income.
FAIRNESS OPINION
Based on the considerations as set out in this report, Glanville is of the
opinion that the proposed transaction is fair to the shareholders (and holders
of options and warrants) of Commonwealth. It is Glanville's opinion that the
existing shareholders of Commonwealth would hold positions in the combined
entity that would have a financial value not less than that of the existing
positions. However, Glanville expresses no opinion as to the expected trading
price of the shares of the combined entity.
<PAGE>
22
CERTIFICATE OF QUALIFICATION
I, Ross Glanville, of 7513 Pandora Drive, Burnaby, British Columbia, Canada,
hereby certify that:
1. I graduated with a B.A. Sc. (Engineering) degree from the University of
British Columbia in 1970.
2. I obtained a Masters Degree in Business Administration (MBA) from the
University of British Columbia in 1974.
3. I am a registered member of the Association of Professional Engineers of
British Columbia, and have been since 1972.
4. I became a member of the Certified General Accountants Association of
British Columbia in 1984.
5. I am President of Ross Glanville & Associates Ltd., a company specializing
in the valuations of companies and exploration properties.
6. I have been practising my engineering profession since 1970, and have
valued several hundred companies and mining properties in North America,
South America, Europe, Asia, Africa and Australia.
7. I was formerly President of Giant Bay Resources Ltd. and Vice-President -
Valuations of Wright Engineers Limited (now Fluor Daniel Wright), a large
international engineering and consulting company. Prior to that I was a
mining engineer and transportation manager with Placer Dome Ltd., and a
mining and project analyst with two major investment holding companies.
8. The attached Fairness Opinion has been prepared for Commonwealth Energy
Corp. ("Commonwealth") and Empire Energy Corporation ("Empire") and is
based partly on information provided to me by Commonwealth and Empire.
Although it is believed that the information received is reliable under the
conditions and subject to the limitations contained herein, and while
information has been checked as to its reasonableness, Ross Glanville &
Associates Ltd. cannot guarantee the accuracy thereof.
9. I have no interest, nor do I expect to receive any interest, either
directly or indirectly, in Commonwealth or Empire, or their subsidiaries or
associated companies.
Signed in Vancouver, British Columbia, on the 15th day of December, 2000.
-------------------------------------------
Ross O. Glanville, B.A. Sc., P.Eng., M.B.A.
C35-6.gla
<PAGE>
TABLE OF CONTENTS
EXECUTIVE SUMMARY............................................................2
INTRODUCTION AND TERMS OF REFERENCE..........................................5
TERMS OF ENGAGEMENT.......................................................5
CREDENTIALS OF GLANVILLE..................................................5
SCOPE OF REVIEW...........................................................6
KEY ASSUMPTIONS AND LIMITATIONS...........................................7
AGREEMENT BETWEEN COMMONWEALTH AND EMPIRE....................................8
COMMONWEALTH ENERGY CORP.....................................................9
OVERVIEW..................................................................9
BEDSOLE UNIT (LEON COUNTY, TEXAS).........................................9
CAMP COLORADO (COLEMAN COUNTY, TEXAS)....................................11
OLD WORLD PROSPECT (PARKER COUNTY, TEXAS)................................11
TYLER LEASE (WASHINGTON COUNTY, OKLAHOMA)................................12
ALBERTA PROPERTIES.......................................................13
WYOMING PROPERTIES.......................................................13
OTHER ASSETS/LIABILITIES.................................................14
SHARE STRUCTURE/TRADING PRICES...........................................14
EMPIRE ENERGY CORPORATION...................................................16
OVERVIEW.................................................................16
OVERTON COUNTY, TENNESSEE................................................16
INDUSTRIA OKLAHOMA-NICARAGUA S.A.........................................17
LEON COUNTY, TEXAS.......................................................18
OMEGA INTERNATIONAL, INC.................................................19
TALISMAN MARKETING INC...................................................19
OTHER ASSETS/LIABILITIES.................................................19
SHARE STRUCTURE/TRADING PRICES...........................................19
ADVANTAGES OF PROPOSED COMBINATION.......................................20
DEFINITION OF FAIRNESS......................................................22
FAIRNESS CONSIDERATIONS.....................................................22
FAIRNESS OPINION............................................................23
CERTIFICATE OF QUALIFICATION................................................24
<PAGE>
Empire Energy Corporation
7500 College Boulevard, Suite 1215
Overland Park, Kansas 66210
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
OF EMPIRE ENERGY CORPORATION
The undersigned having received the Notice of Special Meeting of
Stockholders and Proxy Statement dated January 16, 2001, hereby appoints Norman
L. Peterson or his designee with full power of substitution and revocation to
represent the undersigned and to vote all the shares of the common stock of
Empire Energy Corporation (the "Company") which the undersigned is entitled to
vote at the Special Meeting of the Shareholders of the Company to be held on
February 16, 2001 and any postponement or adjournment thereof.
(1) Vote FOR [ ] AGAINST [ ] with or without variations, the special
resolution, as outlined in the attached Proxy Statement, regarding the
proposed acquisition by Empire Energy Corporation of all of the issued and
outstanding shares of Commonwealth Energy Corp. In voting for the
acquisition you are also voting in favor of amending and restating Empire's
Articles of Incorporation providing for the following items in order to
consummate the acquisition:
(a) Increase of Empire's number of board of directors from five (5) to
seven (7); and
(b) The authorization and issuance of 6,000,000 shares of a second class
of stock, Class B Redeemable Voting Common Stock having a par value of
$.0001 per share.
Further, a vote in favor of the acquisition will also authorize the
formation of Empire Exchangeco, a wholly-owned Canadian subsidiary of
Empire.
In connection with expanding Empire's board of directors from five (5) to
seven (7), Messrs. Lorne Torhjelm and Sieg Deckert will be appointed to its
board of directors until the next annual shareholders meeting.
(2) IN HIS DISCRETION, THE PROXY IS AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned Shareholder. If no direction is made, this Proxy will
be voted for the proposed acquisition and for proposal 2.
The undersigned hereby revokes any proxies as to said shares heretofore
given by the undersigned, and ratifies and confirms all that said attorneys and
proxies may lawfully do by virtue hereof.
<PAGE>
THIS PROXY CONFERS DISCRETIONARY AUTHORITY IN RESPECT TO MATTERS NOT KNOWN
OR DETERMINED AT THE TIME OF THE MAILING OF THE NOTICE OF THE SPECIAL MEETING OF
SHAREHOLDERS TO THE UNDERSIGNED.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and Proxy Statement furnished therewith.
Dated:
----------------------------
---------------------- ----------------------------------
Number of Shares Signature(s) of Shareholder(s)
Signature(s) should agree with the
name(s) appearing hereon.
Executors, administrators,
------------------------- trustees, guardians and attorneys
Print Name of Shareholder should indicate when signing.
Attorneys should submit powers of
attorney.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF EMPIRE
ENERGY CORPORATION. PLEASE SIGN AND RETURN THIS PROXY TO EMPIRE ENERGY
CORPORATION, 7500 COLLEGE BOULEVARD, SUITE 1215, OVERLAND PARK, KANSAS 66210.
THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND
THIS MEETING.
